Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

Yes

x

No

o

If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.

Yes

o

No

x

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes

x

No

o

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.

Large accelerated filerx

Accelerated filero

Non-accelerated filero

Indicate by check mark which financial statement item the registrant has
elected to follow.

Item 17

o

Item 18

x

If this is an annual report, indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Elbit Systems Ltd.’s (Elbit Systems) consolidated financial statements
are prepared in accordance with United States Generally Accepted Accounting Principles
(U.S. GAAP). Unless otherwise indicated, all financial information contained in this Annual
Report on Form 20-F is presented in U.S. dollars. References in this Form 20-F to the
“Company” are to Elbit Systems and our subsidiaries.

The following selected consolidated financial data of Elbit Systems as of
and for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 are derived from our
audited consolidated financial statements of which the financial statements as of December
31, 2006 and 2007, and for each of the years ended December 31, 2005, 2006 and 2007, appear
later in this Annual Report on Form 20-F. The audited financial statements have been
prepared in accordance with U.S. GAAP. You should read the information presented below in
conjunction with this statement.

1

Years Ended December 31

2003

2004

2005

2006

2007

(U.S. dollars in millions except for share and per share
amounts)

Income Statement Data:

Revenues

$

898

$

940

$

1,070

$

1,523

$

1,982

Cost of revenues

673

690

787

1,150

1,455

Restructuring expenses

—

—

3

—

10

Gross profit

225

250

280

373

516

Research and development expenses, net

55

67

72

92

127

Marketing, selling, general and

administrative expenses

116

118

133

189

264

In-process research and

development write-off

—

—

8

—

17

Operating income

54

65

67

92

108

Financial expenses, net

(5

)

(6

)

(11

)

(21

)

(19

)

Other income (expenses), net

—

1

(5

)

2

—

Income before taxes on income

49

60

51

72

89

Taxes on income

11

15

16

21

14

Equity in net earnings (losses) of affiliated companies and
partnership

7

7

(2

)*

15

15

Minority interest in losses (earnings) of
subsidiaries

1

—

—

6

(13

)

Net income

$

46

$

52

$

33

$

72

$

77

Earnings per share:

Basic net income per share

$

1.18

$

1.30

$

0.80

$

1.75

$

1.82

Weighted average number of shares used in computation of
basic net income per share (in thousands)

39,061

39,952

40,750

41,340

42,041

Diluted net income per share

$

1.14

$

1.26

$

0.78

$

1.72

$

1.81

Weighted average number of shares used in computation of
diluted net income per share (in thousands)

40,230

41,041

41,623

41,880

42,342

_______________________

* Includes
acquired in-process research and development write-off of $8.5 in 2005.

2

December 31

2003

2004

2005

2006

2007

(U.S.
dollars in millions except for share and per share amounts)

Balance Sheet Data:

Cash, cash equivalents and short-term investments

$

77

$

35

$

97

$

88

$

377

Long-term deposits, trade receivables, and marketable
securities

2

2

2

6

34

Working capital

199

173

227

112

157

Short-term debt

15

10

38

28

29

Long-term debt

62

86

225

125

431

Share capital

11

.3

11

.5

11

.6

11

.9

11

.9

Shareholders’ equity

452

432

451

494

537

Total assets

$

1,024

$

1,034

$

1,622

$

1,773

$

2,781

Outstanding ordinary shares of NIS 1 par value (in
thousands)

39,337

40,561

40,967

42,017

42,060

Dividends paid per ordinary share with respect to the
applicable year

$

0

.40

$

2

.17*

$

0

.54

$

0

.61

$

0

.67

_____________________

*
Including an extraordinary dividend of $1.80 declared in the second quarter of
2004.

This Annual Report on Form 20-F contains forward-looking statements (within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended) regarding the Company, to the extent such
statements do not relate to historical or current fact. Forward-looking statements are
based on management’s expectations, estimates, projections and
assumptions.

Forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking
statements generally are identified by the words “believe,”
“project,” “expect,” “will likely result,” and
“strategy,” “plan,” “may,” “should,”
“will,” “would,” “will be,” “will
continue,” “will likely result” and similar expressions. Forward-looking
statements are based on current expectations and assumptions and are not guarantees of
future performance and involve certain risks and uncertainties, which are difficult to
predict. Therefore, actual future results, performance and trends may differ materially
from these forward-looking statements due to a variety of factors, including, without
limitation:

-

scope and length of customer contracts;

-

governmental regulations and approvals;

-

changes in governmental budgeting priorities;

-

general market, political and economic conditions in the
countries in which we operate or sell, including Israel and the United
States among others;

-

differences in anticipated and actual program performance,
including the ability to perform under long-term fixed-price contracts;
and

-

the outcome of legal and/or regulatory
proceedings.

The factors listed above are not all-inclusive, and further information is
contained in this Annual Report on Form 20-F. All forward-looking statements speak only as
of the date of this Annual Report. We expressly disclaim any obligation to update or review
any forward-looking statements, whether as a result of new information, future events or
otherwise, except as may be required by applicable law.

Our
revenues depend on a continued level of government
business.A significant portion
of our revenues comes, directly or indirectly, from contracts or subcontracts with domestic
and foreign government agencies. A reduction in the level of the purchase of our systems,
products, services and upgrade projects by these agencies, mainly the Israeli Ministry of
Defense (IMOD), the U.S. Department of Defense (DOD) and governmental customers of our
other major programs, would have a material adverse effect on our business. The development
of our business in the future will depend on the continued willingness of the IMOD, the DOD
and other governmental purchasing agencies to commit substantial resources to defense
programs and, in particular, to continue to purchase our systems, products, services and
upgrade projects.

terminate, reduce or modify contracts or subcontracts if
their requirements or budgetary constraints change;

•

cancel multi-year contracts and related orders if funds
become unavailable;

•

shift spending priorities into other areas or for other
products; and

•

adjust contract costs and fees on the basis of
audits.

We are
subject to buy-back obligations.A number of our
international programs require us to meet “buy-back” obligations. See below
– Item 4. Information on the Company – Buy-Back. Should we be unable to meet
such obligations we may be subject to contractual penalties. Moreover, our chances of
receiving further business from the applicable customers could be reduced.

We depend
on governmental approval of our exports.Many of our exports
and the receipt of technology and components from suppliers depend on receipt of export
license approvals from the Israeli Government, the U.S. Government and other governments.
Such licenses and approvals also are required for technological exchanges with our
customers and for employment of our technical personnel abroad. There is no assurance that
such approvals will be given in the future, current approvals will not be revoked or
governmental export policies will remain unchanged. See below - Item 4. Information on the
Company – Governmental Regulations.

We depend
on international operations.We
depend on sales to customers throughout the world. We expect that international sales will
continue to account for a significant portion of our revenues for the foreseeable future.
As a result, changes in international, political, economic or geographic events could
result in significant shortfalls in orders or revenues. These shortfalls could cause our
business, financial condition and results of operations to be harmed. Some of the risks of
doing business internationally include:

-

unexpected changes in regulatory requirements;

5

-

our or our subcontractors’ inability to obtain export
licenses;

-

imposition of tariffs and other barriers and
restrictions;

-

burdens of complying with a variety of foreign
laws;

-

political and economic instability; and

-

changes in diplomatic and trade relationships.

Some of these
factors, such as the ability to obtain export licenses and changes in diplomatic relations,
may be affected by Israel’s overall political situation. See “Risks Related to
Our Israeli Operations” below. In addition, the economic and political stability of
the countries of our major customers and suppliers may also impact our business.

Our
revenues depend on obtaining follow-on
business.Follow-on orders are
important because our contracts are mainly for fixed periods of up to five years or more,
particularly for contracts where the customer has options to purchase additional items. In
addition, when we have supplied a system for a defense platform, we sometimes have the
potential to supply other items for that platform. If a customer is dissatisfied with our
performance on a particular program or if the customer’s priorities change, it could
negatively affect our ability to receive follow-on business. Inability to obtain follow-on
business could result in a loss of revenues and profit.

Our
contracts may be terminated for convenience of the customer or for default.Our contracts with the Government of Israel and other governments often
contain provisions permitting termination for convenience of the customer. Our subcontracts
with non-governmental prime contractors sometimes contain similar provisions. In general,
in order to reduce risks of financial exposure resulting from the early termination of a
contract, we attempt to flow down these requirements to our subcontractors and expend funds
for projects according to the contract performance schedule. If the customer were to make
an early termination for convenience, in most cases we would be entitled under the
applicable contract to reimbursement for our incurred contract costs and a proportionate
share of our fee or profit for work actually performed. If, however, it is determined that
we are not entitled to such compensation, it could cause us to suffer corresponding losses.
Moreover, if in the remote event that any of our contracts would be terminated for default
due to our failure to meet material contractual obligations, we could face liability in
certain cases in excess of the amounts paid or payable to us under the applicable
contract.

We face
risks of changes in costs under fixed-price contracts.Most
of our contracts are fixed-price contracts, as opposed to cost-plus or cost-share type
contracts. Generally, a fixed-price contract price is not adjusted as long as the work
performed falls within the original contract scope. Therefore, under these contracts, we
generally assume the risk that increased or unexpected costs may reduce profits or generate
a loss. The risk can be particularly significant under a fixed-price contract involving
research and development for new technology, where estimated gross profit or loss from
long-term projects may change and such changes in estimated gross profit/loss are recorded
on a cumulative catch-up basis. See below – Item 5. Operating Financial Review and
Prospects – Management’s Discussion and Analysis – General - Critical
Accounting Policies and Estimates. The frequent need to bid on fixed-price programs before
completing the necessary design may result in unexpected technological difficulties, cost
overruns and potential contractual penalties. Typically, costs must be accounted for in the
period they are recognized. In addition, there is difficulty in forecasting long-term costs
and schedules and the potential obsolescence of products or components related to long-term
fixed-price contracts, particularly in contracts that contain extended warranty or logistic
support obligations.

6

We
sometimes participate in risk-sharing contracts.We sometimes
participate in “risk-sharing” type contracts, in which our non-recurring costs
are only recoverable if there is a sufficient level of production sales for the applicable
product, which level of sales typically is not guaranteed. If production sales do not occur
at the level anticipated, we may not be able to recover our non-recurring costs under the
contract.

We face
fluctuations in revenues and profit margins.The level of our
revenues may fluctuate over different periods. These fluctuations may relate to factors in
addition to changes in pricing or sales volume. Also, the level of our revenues may be
dependent on our mix of projects during any given period. Moreover, since project revenues
generally are recognized in connection with achievement of specific performance milestones,
we may experience significant fluctuations in year-to-year and quarter-to-quarter financial
results. Similarly, our profit margins may vary significantly from project to project as a
result of changes in estimating gross profits that are recorded in results of operations on
a cumulative catch-up basis. See below – Item 5. Operating Financial Review and
Prospects – Management’s Discussion and Analysis – General –
Critical Accounting Policies and Estimates. As a result, the overall profit margin in a
particular period is influenced by a number of conditions. These include the type, size and
stage of projects, the percentage of work performed by subcontractors and the timing of the
recognition of revenue.

We
sometimes have risks relating to financing for our programs.A number of our major projects require us to arrange, or to provide,
specific guarantees in connection with the customer’s financing of the project. These
include guarantees by us as well as guarantees provided by financial institutions relating
to advance payments received from customers. Customers typically have the right to draw
down against advance payment guarantees if we were to default under the applicable
contract. In addition, some customers require that the payment period under the contract be
extended for a number of years, sometimes beyond the period of contract performance. See
below – Item 4. Information on the Company – Financing Terms.

We face
currency exchange risks.As more of our revenues are
generated in currencies other than the U.S. dollar, mainly in New Israeli Shekels (NIS),
Great Britain Pounds (GBP) and Euro, we are subject to increasingly significant foreign
currency risk. Accordingly, our level of revenues and profit may be adversely affected by
exchange rate fluctuations. This also may include risks relating to exchange rate changes
during the period from the date we submit a price proposal until the date of contract
award. Moreover, since a significant portion of expenses is denominated in NIS, if we do
not adequately hedge against exchange rate risks, our financial results could be adversely
affected. See below “Risks Related to Our Israeli Operations – Changes in the
U.S. Dollar –NIS Exchange Rate” and Item 5. Operating Financial Review and
Prospects – Management’s Discussion and Analysis – Impact of Inflation
and Exchange Rates.

We may not
be able to consolidate the financial results of some of our subsidiaries.One of our subsidiaries currently is considered for accounting purposes as a
variable interest entity (VIE), and we are considered the primary beneficiary, enabling us
to consolidate its financial results in our consolidated financial statements. In the event
that in the future a company we hold as a VIE would no longer meet the definition of a VIE,
or we are deemed not to be the primary beneficiary, we would not be able to consolidate
line by line that entity’s financial results in our consolidated financial
statements.

7

We may experience production delays or liability if suppliers
fail to make compliant or timely deliveries.The manufacturing process for some of our products consists in large part of
the assembly, integration and testing of purchased components. Some components are
available from a small number of suppliers, and in a few cases we work with suppliers that
are effectively our sole source. If a supplier should stop delivery of such components,
finding another source could result in added cost and manufacturing delays. Moreover, if
our subcontractors fail to meet their design, delivery schedule or other obligations we
could be held liable by our customers, and there can be no assurance that we would be able
to obtain full or partial recovery from our subcontractors for those liabilities. In
addition, when we act as a subcontractor, the failure or inability of the prime contractor
to perform its contract with the customer may affect our ability to obtain payments under
our subcontract. This could have a material adverse effect on our operating
results.

Undetected problems in our products could impair our financial results
and give rise to potential product liability claims.If there
are defects in the design, production or testing of our or our subcontractors’
products and systems, we could face substantial repair, replacement or service costs and
potential liability and damage to our reputation. There can be no assurance that our
efforts to implement appropriate design, testing and manufacturing processes for our
products or systems will be sufficient to permit us to prevent such occurrences, which
could have a material adverse effect on our business, results of operations and financial
condition.

We
operate in a competitive industry.The various markets in which we participate are highly competitive and
characterized by technological change. If we are unable to improve existing systems and
products and develop new systems and technologies in order to meet evolving customer
demands, our business could be adversely affected. In addition, our competitors could
introduce new products with innovative capabilities, which could adversely affect our
business. There are many competitors in our markets. We compete with many large and
mid-tier defense contractors on the basis of system performance, cost, overall value,
delivery and reputation. Many of these competitors are much larger than us and generally
have greater resources. Consequently, these competitors may be better positioned to take
advantage of economies of scale and develop new technologies. Some of these competitors are
also our suppliers in some programs.

We
are subject to the increasingly restrictive publicly traded company regulatory
environment.As a company whose shares are publicly traded
both in the United States and in Israel, we are subject to the increasingly restrictive
regulatory requirements applicable to publicly traded companies. These regulations,
including the U.S. Sarbanes-Oxley Act of 2002 and other laws and regulations, impose new
and stringent requirements, which we continue to implement in compliance with regulatory
deadlines. Failure to timely implement such requirements could adversely affect
us.

Our share price may be volatile and may decline.Numerous factors, some of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly. These factors include both
specific developments relating to the Company as well as market conditions in the industry
in which we operate and the general state of the securities markets, with particular
emphasis on the technology, defense and Israeli sectors of the securities
markets.

Our
investments in auction rate securities or similar financial instruments may fluctuate in
value.Due to the continuing changes and uncertainty in the
auction rate securities (ARS) markets, it is possible that our investments in ARS may
fluctuate and decline in the future. Also, as market conditions change, we may determine
that unrealized losses, which are currently considered temporary in nature, may become
“other-than-temporary,” resulting in an impairment charge. Such impairment
might also apply to any investments we may make in similar types of variable rate
securities or financial instruments. See below Item 5. Operating Financial Review and
Prospects - Management’s Discussion and Analysis – Liquidity and Capital
Resources – Auction Rate Securities.

8

Our
business depends on proprietary technology that may be
infringed. Many of our systems and products depend on our
proprietary technology for their success. Like other technology oriented companies, we rely
on a combination of patents, trade secrets, copyrights and trademarks, together with
non-disclosure agreements, contractual confidentiality clauses, including those in
employment agreements, and technical measures to establish and protect proprietary rights
in our products. Our ability to successfully protect our technology may be limited
because:

•

some foreign countries may not protect proprietary rights as
fully as do the laws of the United States and Israel;

•

detecting infringements and enforcing proprietary rights may
be time consuming and costly, diverting management’s attention and
company resources;

•

measures such as entering into non-disclosure agreements
afford only limited protection;

•

unauthorized parties may attempt to copy aspects of our
products or technologies and develop similar products or technologies or
obtain and use information that we regard as proprietary;

competitors may independently develop products that are
substantially equivalent or superior to our products or circumvent
intellectual property rights; and

•

competitors may register patents in technologies relevant to
our business areas.

In
addition, others may allege infringement claims against us and affiliated companies. The
cost of defending infringement claims could be significant, regardless of whether the
claims are valid. To the extent we are not successful in defending such claims, we may be
subject to injunctions with respect to the use or sale of certain of our products or to
liabilities for damages and may be required to obtain licenses which may not be available
on reasonable terms, any of which may have a material adverse impact on our business,
results of operation or financial condition.

We
would be adversely affected if we are unable to retain key
employees. Our success depends in part on key management,
scientific and technical personnel and our continuing ability to attract and retain highly
qualified personnel. There is competition for the services of such personnel. The loss of
the services of key personnel, and the failure to attract highly qualified personnel in the
future, may have a negative impact on our business. Moreover, it may be difficult for us to
restrict our competitors from gaining access to the expertise of our former employees who
may be hired by those competitors.

We
may face labor relations disputes or not be able to amend collective bargaining agreements
in a timely manner.A number of our
subsidiaries in Israel and other countries are parties to collective bargaining agreements
that cover a substantial number of the Company’s employees. These agreements contain
a range of conditions that vary depending on the applicable company and are for various
periods of time. Disputes with trade unions or similar types of labor relations
difficulties as well as failure to timely amend or extend collective bargaining agreements
could lead to worker disputes, slow-downs, strikes and other measures, which could
negatively impact our results of operations.

9

Our
industry has experienced significant consolidation.As the
overall number of companies in the defense industry has decreased in recent years, the
industry has experienced substantial consolidation, thus increasing the market share of
some prime contractors. Failure to maintain our relationships with these major contractors
could negatively impact our future business. In addition, some of these companies are
vertically integrated with in-house capabilities similar to ours in certain
areas.

We
face acquisition and integration risks.Over the past several years we have made a number of acquisitions and
investments in companies that complement our business. See below – Item 4.
Information on the Company – Recent Acquisitions and – Current Business
Operations. We intend to continue to acquire businesses that complement our operations. Our
growth may place significant demands on our management and our operational, financial and
marketing resources. In connection with acquisitions and the opening of new facilities we
have increased and may continue to increase the number of our employees. Moreover, several
of our recent acquisitions involve companies with collective bargaining agreements
applicable to a significant number of the company’s employees. In addition, we have
expanded and may continue to expand the scope and geographic area of our operations. We
believe this growth will increase the complexity of our operations and the level of
responsibility exercised by both existing and new management personnel. Failure to
successfully retain key employees and integrate and manage our growth may have a material
adverse effect on our business, financial condition, results of operations or
prospects.

Our
acquisitions are subject to governmental approvals.Most
countries require local governmental approval of acquisition of domestic defense
industries, which approval may be denied if the local government determines the acquisition
is not in its national interest. We may also encounter anti-trust issues in certain areas
as our operations expand. Failure to obtain such governmental approvals could negatively
impact our future business and prospects.

Our
due diligence in acquisitions may not adequately cover all risks.There may be liabilities or risks that we fail or are unable to discover in
the course of performing due diligence investigations relating to businesses we have
acquired or merged with or may acquire or merge with in the future. Examples of these
liabilities include employee benefits contribution obligations, estimated costs to complete
contracts, non-compliance with applicable environmental requirements or infringement of
third party intellectual property rights by prior owners for which we, as a successor
owner, may be responsible. Such risks may include changes in estimated costs to complete
programs and estimated future revenues. In addition, there may be additional costs relating
to acquisitions including, but not limited to, possible purchase price adjustments.
Moreover, if the value of the acquired company were to decrease after the acquisition, or
after follow-on investments in that company, we could face impairment issues. We try to
minimize these risks by conducting due diligence as we deem appropriate under the
circumstances. However, there is no assurance that we have identified, or in the case of
future acquisitions, will identify, all existing or potential risks. Also, although
generally we require the sellers of acquired businesses or assets to indemnify us against
undisclosed liabilities, we cannot assure you that the indemnification will be enforceable,
collectible or sufficient to fully offset the possible liabilities. Such liabilities could
have a material adverse effect on our business, financial condition, results of operations
or prospects. In addition, there may be situations in which our management determines,
based on market conditions or other applicable considerations, to pursue an acquisition
with limited due diligence or without performing due diligence at all.

10

Risks Related to Our Israeli
Operations

Conditions
in Israel may affect our operations.Political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel, a number of armed conflicts
have taken place between Israel and its Arab neighbors. A state of hostility, varying in
degree and intensity has led to security and economic problems for Israel. Since 2000,
there have been ongoing hostilities between Israel and the Palestinians, which have
adversely affected the peace process and at times has negatively influenced Israel’s
economy as well as its relationship with several other countries. In 2006, Israel
experienced a war with Hezbollah militants in Lebanon. Hamas, an Islamist movement
responsible for many attacks, including missile strikes, against Israelis, won the majority
of the seats in the Parliament of the Palestinian Authority in 2006 and took control of the
entire Gaza Strip by force in June 2007. These developments have further strained relations
between Israel and the Palestinians. There is no assurance that the current political
situation with Israel’s neighbors will improve or, if it did, that the political and
economic situation in Israel would improve as a result. These political, economic and
military conditions in Israel could have a material adverse effect on our business,
financial condition, results of operations and future growth.

Political relations could limit our ability to sell or buy
internationally.We could be adversely affected by the
interruption or reduction of trade between Israel and its trading partners. Some countries,
companies and organizations continue to participate in a boycott of Israeli firms and
others doing business with Israel or with Israeli companies. Foreign government defense
export policies towards Israel could also make it more difficult for us to obtain the
export authorizations necessary for our activities. Also, over the past several years there
have been calls in Europe and elsewhere to reduce trade with Israel. There can be no
assurance that restrictive laws, policies or practices directed towards Israel or Israeli
businesses will not have an adverse impact on our business.

Israel’s economy may become unstable.Over the years, Israel’s economy has been subject to a number of
factors that have affected its stability. These include periods of inflation, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. For these and other reasons, the Government of Israel has intervened in different
sectors of the economy. Such intervention has included employing fiscal and monetary
policies, import duties, foreign currency restrictions, controls of wages, prices and
foreign currency exchange rates and regulations regarding the lending limits of Israeli
banks to companies considered to be in an affiliated group. The Israeli Government has
periodically changed its policies in all of these areas. Reoccurrence of previous
destabilizing factors could make it more difficult for us to operate our business as we
have in the past and could adversely affect our business.

Changes in the U.S. dollar - NIS exchange rate.The exchange rate between the NIS and the U.S. dollar has fluctuated in
recent years. For example, at the end of 2005, 2006 and 2007, the NIS/U.S. dollar exchange
rate was 4.603, 4.225 and 3.846, respectively. This represented a strengthening of the NIS
vis-à-vis the U.S. dollar of approximately 8.2% in 2006 and approximately 9.0% in
2007. During the first four months of 2008, the NIS strengthened by approximately 10.8%
against the U.S. dollar, and the NIS/U.S. dollar exchange rate as of April 30, 2008 was
3.429. While most of our sales and expenses are denominated in dollars, a significant
portion of our expenses is paid in NIS, and most of our sales to customers in Israel are in
NIS. Our primary expenses paid in NIS that are not linked to the dollar are employee
expenses in Israel and lease payments on some of our Israeli facilities. As a result, if we
do not hedge our position, a change in the value of the NIS compared to the dollar, which
over the past year has undergone numerous fluctuations, could affect our research and
development expenses, manufacturing labor costs and general and administrative expenses.
See below – Item 5. Operating Financial Review and Prospects –
Management’s Discussion and Analysis - Impact of Inflation and Exchange Rates –
Inflation and Devaluation.

Israeli Government programs and tax benefits may be terminated or
reduced in the future.Elbit Systems and some of our Israeli
subsidiaries participate in programs of the Israeli Chief Scientist’s Office (OCS)
and the Israel Investment Center, for which we receive tax and other benefits as well as
funding for the development of technologies and products. The benefits available under
these programs depend on meeting specified conditions. If we fail to comply with these
conditions, we may be required to pay additional taxes and penalties, make refunds and be
denied future benefits. From time to time, the Government of Israel has discussed reducing
or eliminating the benefits available under these programs. See below - Item 4. Information
on the Company – Conditions in Israel – Chief Scientist (OCS) and Investment
Center Funding. We cannot assure you that these benefits will be available in the future at
their current levels or at all.

Israeli law regulates acquisition of a controlling interest in Israeli
defense industries.Israeli legislation regarding the
domestic defense industry requires Israeli Government approval of an acquisition of a 25%
or more equity interest (or a smaller percentage that constitutes a “controlling
interest”) in companies such as Elbit Systems. This could limit the ability of a
potential purchaser to acquire a significant interest in our shares. See below – Item
4. Information on the Company – Governmental Regulation – Approval of Israeli
Defense Acquisitions.

Israel has enhanced its export control regulations.Over the last two years the Israeli Government adopted laws and regulations
regarding enhanced defense export controls and the export of “dual use” items.
Should government approvals required under these laws and regulations not be obtained, our
ability to export our products from Israel could be negatively impacted, including
revocation of authorizations previously granted, thus causing a reduction in our revenues.
See below – Item 4. Information on the Company – Governmental Regulation -
Israeli Export Regulations.

It
may be difficult to enforce a non-Israeli judgment against us, our officers and
directors.We are incorporated
in Israel. Most of our executive officers and directors are nonresidents of the United
States, and a substantial portion of our assets and the assets of these persons are located
outside the United States. Therefore, it may be difficult for an investor, or any other
person or entity, to enforce against us or any of those persons in an Israeli court a U.S.
court judgment based on the civil liability provisions of the U.S. federal securities laws.
It may also be difficult to effect service of process on these persons in the United
States. Additionally, it may be difficult for an investor, or any other person or entity,
to enforce civil liabilities under U.S. federal securities laws in original actions filed
in Israel. See below – Item 4. Information on the Company – Conditions in
Israel – Enforcement of Judgments.

We develop, manufacture and integrate advanced, high-performance defense
electronic and electro-optic systems for customers throughout the world. The Company
focuses on designing, developing, manufacturing and integrating command, control,
communication, computer, intelligence, surveillance and reconnaissance (C4ISR) network
centric systems, including unmanned vehicles, for defense and homeland security
applications. We also perform upgrade programs for airborne, land and naval defense
platforms, often as a prime contractor. Moreover, we develop and manufacture avionic and
aerostructure products for the commercial aviation market. In addition, we provide a range
of support services.

Many of these major activities have a number of common and related elements.
Therefore, marketing, research and development, manufacturing, performance of programs,
sales and after sales support often are conducted jointly among these areas of
activities.

13

We tailor and adapt our technologies, integration skills, market knowledge
and battle-proven systems to each customer’s individual requirements in both existing
and new platforms. By upgrading existing platforms with advanced electronic and
electro-optic technologies, we provide customers with cost-effective solutions, and our
customers are able to improve their technological and operational capabilities within
limited defense budgets.

The military actions in recent years and ongoing terrorist activities have
caused a shift in the defense priorities for many of our major customers. More emphasis is
being placed on C4I systems, as well as intelligence, surveillance and reconnaissance (ISR)
systems. These include network centric information systems, intelligence gathering, border
and perimeter security, UAVs, unmanned ground vehicles (UGVs), unmanned surface vessels
(USVs) remote controlled systems, space and satellite based defense capabilities and
homeland security applications. There is also a growing demand for cost effective logistic
support and training services. The market for cost effective avionic products for
commercial and general aviation aircraft is also expanding.

We believe our existing systems, products and capabilities place us in a
position to meet emerging customer requirements in many of these areas. We continue to
perform platform upgrades and believe that some types of upgrade programs and electronic
and electro-optic systems, particularly those that emphasize C4ISR, will continue to be a
significant portion of defense budgets in many countries. Our customers are increasingly
expecting us to provide overall solutions to their comprehensive defense and security
needs, which we believe is conducive to our growing expertise in providing “systems
of systems.”

Moreover, the worldwide defense market has been characterized over the last
decade by significant consolidation and merger and acquisition activities. Part of our
growth strategy includes our continued activity in mergers and acquisitions both in Israel
and internationally. We would view positively implementation of the Government of
Israel’s previously declared policy to privatize portions of government-owned
industries, and we see the Company as a natural candidate to acquire some of these
activities.

We operate as a multi-domestic organization in order to meet the needs of
our customers around the world. The Company’s structure enables us to benefit from
the synergy of our overall capabilities while at the same time focus on local
requirements.

We have many decades of operational experience. Elbit Ltd. was initially
incorporated in Israel in 1966 as Elbit Computers Ltd. Thirty years later, in 1996, Elbit
Systems was formed as part of the Elbit Ltd. corporate demerger, which spun-off Elbit
Ltd.’s defense related assets and business to Elbit Systems. From its founding in
1966 until the demerger, Elbit Ltd. was involved, among other operations, in a wide range
of defense related airborne, land, naval and C4I programs throughout the world. Elbit
Systems, which last year celebrated 40 years of Elbit operations, continues these
activities today as the largest non-government-owned defense company in Israel.

During the last three years, in addition to smaller acquisitions, we
acquired a 70% interest in Elisra Electronic Systems Ltd. (Elisra) and a 100% interest in
Tadiran Communications Ltd. (TadComm). Both Elisra and TadComm have several decades of
experience in their respective areas. We are in the process of incorporating
TadComm’s operations into our Land and C4I business. In 2000, Elbit Systems
merged with Elop Electro-Optics Industries, Ltd. (currently known as Elbit Systems
Electro-Optics Elop Ltd.) (Elop). Following the merger, Elop became a wholly-owned
subsidiary of Elbit Systems. Elop has more than 70 years of experience in the
electro-optics area. Several other of our subsidiaries around the world have decades of
experience in their respective markets.

14

As a corporation domiciled and incorporated in Israel, we operate in
accordance with the provisions of the Israeli Companies Law - 1999.

Helmet Mounted Systems.We design and supply advanced helmet mounted systems for fighter aircraft
and helicopter pilots and land applications. These include tracking and display systems for
target designation, weapon and sensor slaving and processing and display of tactical
information for pilots, both for day and night flying. Examples of our fixed-wing helmet
mounted systems currently in operation include the Display and Sight Helmet (DASH) family,
Joint Helmet Mounted Cueing System (JHMCS) and Night Vision Cueing Display system (NVCD).
For helicopters, our operational systems include the Aviator Night Vision Imaging System
Head-Up Display (ANVIS/HUD®) family, Integrated Helmet Display and Sighting System
(IHADSS), Jedeye™ and the Panoramic Night Vision Goggle (PNVG). Our helmet mounted
systems are supplied as part of our upgrade programs as well as on a stand-alone
basis.

15

Commercial Aviation Systems. We design and
manufacture a range of products and systems for the commercial aviation and general
aviation markets. Our commercial aviation product line includes the Vision Based
Cockpit™ concept, incorporating our All Weather Window®Enhanced Vision
System (EVS II), our General Aviation – Vision System (GAViSTM) and our
Advanced Technology Head-Up Display (AT-HUD) and Micro-ViS™ head-up display system.
We also supply cabin pressurization control systems, air data test equipment, air data
processor/sensor systems and flight instruments for the general aviation market. Our legacy
products for commercial aircraft include altimeters, pressure meters, cockpit indicators
and avionics test equipment.Our commercial avionics systems are
employed on aircraft such as the Gulfstream 150, 200, 300, 350, 400, 450, 500 and 550, the
Boeing MD-10 and MD-11, the Airbus A300 and A310, the Cessna CJ 1, 2, 3 and 4 Bravo, XLS,
Citation Mustang, ENCORE, Hawker, Beechcraft 400XP and 800XP and King Air series, and on
EC-725 helicopters. We also produce avionic suites, including electronic flight
instrumentation systems and flight management systems for commercial helicopters as well as
produce aerostructure parts for commercial aircraft.

UAS (UAV Systems).We design and supply
integrated UAV systems and mini-UAV systems for a range of ISR applications. We design and
manufacture a variety of UAV platforms, including the Hermes® and Skylark® families
of UAVs. We also design and supply command and control ground station elements that can be
adapted for various types of UAVs, as well as training systems with capabilities to
simulate payload performance, malfunctions and ground control station operation.

C4I and Government Information Systems. We
design, manufacture and integrate C4I systems for ground forces and battlefield management
and control applications. Our C4I solutions are capable of linking every ground forces
echelon to real-time mission or critical information. These include artillery command and
control systems, day-night observation systems, C4I battlefield management systems for
headquarters and maneuvering forces as well as battle management systems for battalion
combat teams,tactical communications systems, satellite
communication systems, wireless communication and radios that provide infrastructure and
connectivity for network centric architecture solutions, tactical ground reconnaissance
systems and tactical battle company trainers. This includes our prime contractor role for
the Israeli Digital Army Program. We also design and manufacture C4I systems and products
for infantry soldiers, including our prime contractor role for the Israeli Future Infantry
Soldier Program. We also design and manufacture governmental information technology systems
and integrated information gathering systems for border control and management systems,
crime prevention and other governmental applications.

16

Military Communications Systems and Products.
We supply military communications systems and products for a wide range of customers
worldwide. Specializing in radio communications, we develop and supply solutions for voice,
data and video (multimedia) applications in a broad range of frequencies, starting at the
VLF band though HF, VHF, UHF to the C-band and further on in the mm wave band. The range of
products and systems facilitate secured and ECCM immuned voice and broadband data
communications, covering the communication needs of all levels of the military echelons.
Military communications product lines include short and medium-range VHF radio systems,
long-range HF radio systems, multi-band VHF-UHF handheld/manpack radios, line-of sight
multi-channel radio systems, ruggedized computers/communication terminals and personal
digital assistance devices (RPDAs), integrated communications systems combining wireless
(radio) and wired (telephony) communications, military wireless broadband systems based on
WiMAX technology, IP/LAN/WAN networks and situation awareness systems.

Electro-Optic and Countermeasures Systems.We
design and manufacture a full range of electro-optics sensors and systems for space, air,
land and sea applications. We cover the full spectrum of electro-optics based solutions
with products ranging from laser and thermal imaging systems to head-up displays, through
ISR systems – including payloads for space, airborne, naval and land-based missions -
to ground integrated sights, electro-optic countermeasures and homeland security solutions.
The range of electro-optics products includes space cameras and telescopes and specialized
sensors, airborne reconnaissance and observation systems. Our electro-optics product line
also includes ground integrated sights and robotic sensors, gated imagery FLIRs for land,
naval and airborne applications, laser range-finders and laser designators based on flash
pumped and diode pumped technologies used by infantry soldiers and in manned and unmanned
airborne vehicles and land and naval platforms. Our electro-optic solutions are used for
detection, identification and information gathering as well as for land vehicle upgrades.
Our ISR related business activities – space cameras, airborne reconnaissance and
observation & surveillance – share a broad infrastructure of technologies that
provide imagery intelligence (IMINT), long-range observation solutions for space, air, sea
and land based sources. In the space area, we also maintain in-house Israel’s
national space electro-optics infrastructure and provide the cameras for the Israeli Ofek
satellites. In addition, we supply dedicated satellite payloads for space research and
advanced multi-spectral and high resolution pan-chromatic cameras for commercial
satellites.

Technology Spin-Offs and Other Commercial Activities.We are engaged in spin-offs of our defense technologies to commercial
applications as well as other commercial activities. Our spin-off and other commercial
activities to date are in the areas of medical equipment, commercial satellites, satellite
communications for commercial aircraft, commercial communications systems, commercial
information technology applications, microwave technology applications, night vision and
fleet management systems for automobiles and general manufacturing services.

General Aviation Vision System (GAViSTM)– low-cost IR based vision system that mounts like an antenna for
general aviation aircraft to provide increased situational awareness at night and in other
low visibility conditions.

Advanced Flight Display System– for
assisting the air crew in flight and mission management, navigation, and communication
while reducing pilot workload and increasing flight safety in both VFR and IFR flight
conditions, allowing the display of all primary flight information, navigation data,
weather radar or digital maps.

Cabin Pressurization Control Systems–
modern solid-state technology, automatic cabin pressurization control systems designed to
minimize cost, weight and panel space for advanced glass cockpits of business and commuter
aircraft.

Color Flat Panel Displays –for
presentation of maps and command and control data, as well as video generated by thermal
imaging systems.

23

See-Through-Armor system (STA)– a 360%
panoramic observation system designed to provide the vehicle crew with an omni-directional
combat scene around their vehicle when the platforms hatches are closed.

Mass Storage Devices– for storage of
maps and battle command information using solid state memory devices based on commercial
off-the-shelf and PCMCIA technology.

Life Support Systems– for environmental,
climate and nuclear, bacterial and chemical (NBC) protection and control.

24

C4I and Government Information Systems

Digital Army “System of Systems” -advanced combat concepts geared to increase operational effectiveness and
connectivity throughout all land force echelons, in all combat situations, under a unified
operational concept, providing computerized systems down to the single soldier level to
facilitate transmission of integrated, real-time situation pictures to and from all
battlefield and command echelons.

Combat NG Artillery Fire Control and C4I Systems- for C4I applications among field artillery units deployed from the
platform to brigade levels, managing all aspects of artillery operations and fire control,
including for theater missile defense applications.

Tactical Radio Systems– comprehensive
HF, VHF and UHF radio communications solutions for maneuvering tactical forces and
headquarters, featuring secured and anti-jamming voice and data communications capabilities
to enable efficient and effective command and control at all echelon levels.

Advanced Power Amplifiers– RF power
amplifiers for ground mobile, shipborne, airborne and fixed-station applications, covering
a wide range of frequencies and power levels and featuring advanced linearization
techniques, high capacity data handling capabilities, low power consumption and high
spectral efficiency.

Tactical Computers and Communication Terminals– advanced and small rugged handheld/mobile computers providing the
combat echelons in the battlefield with digital messaging and navigation capabilities in
support of C4I applications and Ruggedized Personal Digital Assistants (RPDAs), with
functionalities similar to those of civilian PDA products, providing digital mapping,
navigation, route planning, situational awareness, tactical information sharing, mission
planning and other digital battlefield applications under combat conditions.

Integrated Radio Communication System (IRCS)– combines a diverse range of communications networks including
regular telephony, wireless communications and advanced technology-based networks such as
IP and fiber optics into one integrated network.

AW@RENET Communication System– a
tactical situation awareness command, control and communication system that enables the
commanders and soldiers in the field to access and share real-time tactical information via
tactical radio networks by means of end-to-end IP tactical internet
connectivity.

FLIR Systems -for thermal imaging observation
without need for natural or artificial light for air, land and sea platforms, including
hand-carried portable solutions.

Laser Range-Finders and Designators -for range
finding and designation of targets for air, land and naval platforms based on solid state
flash lamp and diode pumped technologies, including eye-safe systems.

Laser Radars– for helicopter obstacle
detection and avoidance during flight.

Airport Security Systems– integrated
security control for airports providing civil aviation authorities means to control airport
perimeters, access to/from the indoor areas, closed-circuit TV and electro-optical
surveillance over perimeter and runways as well as security control centers.

We conduct most of our business in the United States through Elbit Systems
of America, LLC (ESA), a Delaware limited liability company, and its wholly-owned
subsidiaries including: EFW Inc. (EFW), Kollsman, Inc. (Kollsman) and International
Enterprises, Inc. (IEI). ESA also includes Talla-Com, Tallahassee Communications
Industries, Inc. (Talla-Com) and Talla-Com’s wholly-owned subsidiaries Tallahassee
Technologies, Inc. (Talla-Tech) and Mobat USA, Inc., all of which came under the control of
ESA in January 2008. Ownership of Talla-Com will be transferred to ESA upon completion of
the TadComm merger with Elbit Systems. See below – “TadComm.”

ESA was formally established as a legal entity in January 2007, however, we
have owned some of ESA’s subsidiaries since 1992. References below to ESA include
activities of ESA’s subsidiaries in periods prior to 2007. ESA provides products and
system solutions focusing on U.S. military, commercial aviation, homeland security and
medical instrumentation customers. We hold our 100% interest in ESA through a Delaware
holding company, Elbit Systems U.S. Corp. (ESC).

29

In January 2008, ESA reorganized along a number of main business lines
operating out of four primary operational facilities. The business lines include Airborne
Solutions, Land Solutions, C4I Solutions, Sensor and Electro-Optics Solutions, Services and
Support Solutions, Commercial Aviation – Kollsman and Medical Instruments – KMC
Systems. ESA’s main operation centers include its operations in Fort Worth, Texas;
Merrimack, New Hampshire; Tallahassee, Florida and Talladega, Alabama. These are in
addition to ESA’s 50% ownership in Vision Systems International LLC as described
below.

ESA’s main activities in the area of airborne solutions are related to
the design, production and support of a range of avionics products and systems . Airborne
platforms supported by ESA include most of the fighter, transport and rotary-wing aircraft
used by the U.S. Armed Forces. In land solutions ESA’s main activities include the
design, production and support of combat vehicle mission processors and electronic
subsystems, CREW systems, unmanned turrets and weapon stations and robots. ESA is involved
with land platforms and programs including the Bradley A3, MLRS, HIMARS, VHP Hunter (CREW
210) and the MIA1 loader remote weapon station. ESA’s C4I solutions main activities
include military communications, ruggedized computers as well as command and control
systems and products for DOD and U.S. Department of Homeland Security requirements.
ESA’s sensors and electro-optics main activities and programs include thermal
binocular systems, long-range thermal imagers, portable laser designator rangers, thermal
laser spot imagers, common laser designator range-finders, fire control systems and the
Night Targeting System upgrade program.

ESA’s airborne, land, C4I and sensors and electro-optics
solutions’ principal customers include the U.S. Army, U.S. Marine Corps (USMC), U.S.
Navy (USN), U.S. Air Force (USAF), U.S. Coast Guard and various U.S. defense contractors,
including Lockheed Martin, Boeing, BAE, Bell Helicopter, Sikorsky Aircraft and Oto
Melara.

ESA’s services and support main activities include the repair,
maintenance and logistics support for a wide variety of military electronic systems and
components manufactured by numerous original equipment manufacturers (OEMs) installed
on aircraft, helicopters and ground support equipment for the U.S. military and other
customers worldwide.

FMF. ESA also acts as a contractor for U.S.
Foreign Military Funding (FMF) and Foreign Military Sales (FMS) programs. See below
“Governmental Regulations – Foreign Military Funding.”

Engineering and Manufacturing. Each of
ESA’s four major operational facilities has extensive engineering and manufacturing
capabilities. ESA’s facilities in Alabama, Georgia and Texas have significant
maintenance and repair capabilities. See below “Manufacturing” and
“Customer Satisfaction and Quality Assurance.”

SSA. ESA, Elbit Systems, ESC and the DOD are
parties to a Special Security Agreement (SSA). The SSA provides controls and procedures to
protect classified information and export controlled data received by the ESA companies in
performing U.S. Government contracts. The SSA allows the ESA companies to participate in
classified U.S. Government programs even though, due to their ownership by Elbit Systems,
the ESA companies are considered under the control of a non-U.S. interest. Under the SSA, a
Government Security Committee of ESA’s board of directors was permanently established
to supervise and monitor compliance with ESA’s export control and national security
requirements. The SSA also requires ESA’s board of directors to include outside
directors who have no other affiliation with the Company. ESA’s board of directors
also contains officers of ESA and up to two inside directors, who have other affiliations
with the Company. The SSA requires outside directors and officers of the ESA companies who
are directors, and certain other senior officers, to be U.S. resident citizens and eligible
for DOD personal security clearances.

VSI

Vision Systems International LLC (VSI) is a California limited liability
investee company based in San Jose, California. EFW and Rockwell Collins Inc. (Rockwell
Collins) each own 50% of VSI. Founded in 1996, VSI acts on a world-wide basis on behalf of
Rockwell Collins and Elbit Systems/ESA in the area of helmet mounted display systems for
fixed-wing military and paramilitary aircraft. VSI performs marketing, project management,
contract administration and systems engineering. Elbit Systems, ESA and Rockwell Collins
each have provided VSI with licenses to use their helmet mounted display technologies. In
general, VSI subcontracts product development and production to its owners on an
approximately equal basis. Each owner has equal representation in VSI’s
management.

31

VSI is the prime contractor to Boeing and Lockheed Martin for the design and
manufacture of the Joint Helmet Mounted Cueing System (JHMCS) for the USAF, USN and U.S.
Air National Guard (ANG) F-15, F-16 and F/A-18 aircraft. VSI also has contracts to supply
helmet mounted display systems for fighter aircraft to the Israel Air Force (IAF) and
numerous other international customers. VSI has developed a dual-seater version of the
JHMCS and is in full scale JHMCS production for F/A-18.In addition,
VSI is under contract to Lockheed Martin to develop the helmet mounted display system for
the U.S. F-35 Joint Strike Fighter (JSF). See below “Current Business Operations
– Helmet Mounted Systems.”

Elop

Based in Rehovot, Israel, our wholly-owned subsidiary Elop operates in the
area of electro-optic systems and products mainly for defense, space and homeland security
applications. With significant design, engineering and manufacturing capabilities, Elop has
a broad customer base, both in Israel and internationally.

In 2007, Elop received the prestigious Israel Defense Prize for development
of an innovative system for ground forces developed in cooperation with the IDF Ground
Forces Command and the Directorate of Defense R&D of the IMOD. This was the fourth such
prize awarded to Elop in the last 11 years.

TadComm.Tadiran Communications Ltd. (TadComm) is a wholly-owned Israeli subsidiary,
with headquarters in Netanya, Israel. TadComm is engaged in the worldwide market for
military communications systems and equipment and also active in the civilian
communications market. See below “Current Business Operations - Military
Communications Systems.” TadComm has wholly-owned subsidiaries in the U.S. and
Germany. In November 2007, Elbit Systems’ Board of Directors approved a plan to merge
TadComm into Elbit Systems and for TadComm’s Israeli operations to be combined with
Elbit Systems Land and C4I operations under a wholly-owned Israeli subsidiary, Elbit
Systems Land and C4I – Tadiran Ltd., which was established in November 2007. Under
the merger, ownership of the TadComm’s U.S. subsidiaries will be transferred to ESA.
The merger plan is subject to completion of certain approvals which are currently in the
process of being finalized.

Elisra

Elisra is an Israeli company located in Bnei Brak, Israel, held 70% by Elbit
Systems with the balance being owned by Elta Systems Ltd., a subsidiary of Israel Aerospace
Industries Ltd. (IAI). Elisra has two principal wholly-owned Israeli subsidiaries –
Tadiran Electronic Systems Ltd. (Tadiran Systems) and Tadiran Spectralink Ltd. (Tadiran
Spectralink), each located in Holon, Israel.

Elisra was a recipient of the prestigious Israeli Defense Prize in 2007 for
development of a system based on advanced technological components together with teams from
the IMOD R&D Directorate and the Israeli Air Force (IAF).

Cyclone.Cyclone Aviation Products Ltd. (Cyclone) is a wholly-owned Israeli
subsidiary of Elbit Systems. Located near Karmiel, Israel, Cyclone designs and produces
composite and metal aerostructureparts for civil and military
aircraft. Cyclone also performs maintenance, integration of systems and upgrades for
aircraft and helicopters. In 2005, Cyclone acquired the assets of Israel Military
Industries Ltd. (IMI) Aircraft Systems Division, which was involved in manufacturing
weapons pylons and external fuel tanks for fighter aircraft. Both directly and through its
affiliated company Snunit Aviation Services Ltd., Cyclone works with Elbit Systems in
supplying flight training services for IAF fixed-wing aircraft and helicopters.
Cyclone’s customers include the IMOD, the USAF, Boeing, Lockheed Martin, Spirit
AeroSystems, Vought Aircraft, Bell Helicopters, Sikorsky Aircraft, IAI, Aircelle –
Safran Group and other aircraft manufacturers and end users around the world. See below
“Current Business Operations – Military Aircraft and Helicopter Systems –
Logistics Support Services and – Commercial Aviation Systems – Maintenance and
Repairs and - Aerostructure Parts.”

Ferranti.Ferranti Technologies (Group) Limited (Ferranti), a wholly-owned U.K.
subsidiary, was acquired by Elbit Systems in July 2007. Located in Oldham, U.K,
Ferranti’s principal activities include engineering, manufacturing and logistic
support to aerospace and defense industries in the U.K. and internationally.

European Subsidiary.The European Subsidiary is a wholly-owned Belgium subsidiary located in
Oudenaarde, Belgium. It develops, manufactures and supports electro-optical products,
mainly for the defense and space markets.

Elbit Systeme.Elbit Systems S.A. (Elbit Systeme) is a wholly-owned Romanian subsidiary
located in Bucharest, Romania. It serves as the base for our various defense and commercial
operations and holdings in Romania.

Telefunken RACOMS.Telefunken Radio Communications Systems GmbH (Telefunken RACOMS) is a
wholly-owned German subsidiary located in Ulm, Germany. Telefunken RACOMS is active in both
military and civilian communications projects in Germany and internationally.

AEL.Aeroeletronica Ltda. (AEL) is a wholly-owned Brazilian subsidiary. AEL,
located in Porto Alegre, Brazil, performs engineering, manufacturing and logistic support
activities for defense and commercial applications.

U-TacS.UAV
Tactical Systems Ltd. (U-TacS) is a British subsidiary located in Leicester, U.K., held 51%
by Elbit Systems (through a wholly-owned U.K. holding company – Elbit Systems UK
Limited), with the balance being owned by Thales UK Limited, a subsidiary of Thales S.A.
(France). U-TacS’ main business is to perform a major part of the Watchkeeper Program
and other related programs.See below
“Current Business Operations – UAS – Watchkeeper
Program.”

Kinetics.Kinetics Ltd. (Kinetics), based in Airport City, Israel, is owned 51% by
Elbit Systems. The balance is owned by founding employees and private investors in Israel
and the United States. Kinetics develops technologies, systems and products in the field of
advanced life support and environmental controls, such as climate control systems and
nuclear, biological and chemical protection systems for combat vehicles. Also, Kinetics
develops and manufactures other products for land vehicles, such as hydraulic, fuel,
braking and suspension systems, an auxiliary power unit for land vehicle power pack systems
and hydraulic systems for aircraft. Kinetics sells its products to the IDF, the U.S. Army
and other customers. Kinetics wholly-owns Real-Time Laboratories, LLC. a company based in
Boca Raton, Florida, engaged in the U.S. market in similar activities to those of Kinetics.
See below “Current Business Operations – Land Vehicle Systems –
Environmental Control and Hydraulic Systems.”

SCD.Semi-Conductor Devices (SCD) is an Israeli investee partnership equally
owned by Elbit Systems and Rafael Armaments Development Authority Ltd. (Rafael). Located in
Leshem, Israel, SCD develops and manufactures infrared detectors for thermal imaging
equipment and laser diodes used in defense and commercial applications. See below
“Current Business Operations – Electro-Optical and Countermeasures
Systems.”

Opgal.Opgal - Optronics Industries Ltd.
(Opgal)is an Israeli investee company
owned 50.1% by Elbit Systems and 49.9% by Rafael. Located in Karmiel, Israel, Opgal focuses
mainly on commercial applications of thermal imaging and electro-optic technologies. Its
developments include an enhanced vision sensor designed to assist in landing aircraft under
limited visibility and harsh weather conditions. Opgal also designs thermal imaging cameras
and FLIR systems for applications such as surveillance, industrial, medical and fire
fighting. It also produces OEM FLIR cameras for defense applications. See below
“Current Business Operations – Commercial Aviation Systems; and Electro-Optical
and Countermeasures Systems.”

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Others. We have several other smaller
subsidiaries and investee companies in Israel and other countries.

In November 2007, our Board of Directors approved a plan to merge TadComm
into Elbit Systems. Pursuant to the merger plan, TadComm will be merged into Elbit Systems
and will cease to exist as an independent legal entity. Moreover, upon completion of the
merger, our subsidiary, Elbit Systems Land and C4I – Tadiran Ltd., will assume
TadComm’s Israeli operations as well as those of Elbit Systems’ Land and C4I
Division, all in accordance with the merger plan. Also, pursuant to the merger plan,
TadComm’s U.S. subsidiaries will become owned by ESA. The merger plan is subject to
its conditions precedent and is pending final approval of the Israeli Companies
Registrar.

In April 2007, we completed a tender offer for the balance of
TadComm’s shares, increasing our ownership from 42% to 100%. Under the tender offer
we paid a price of approximately $52.32 per share, resulting in total consideration paid by
us under the tender offer, and for the balance of the shares remaining following the tender
offer, of approximately $382 million. Such consideration was paid in cash. As a result of
the tender offer TadComm ceased to be a publicly traded company. TadComm purchased the
balance of the outstanding stock options for the same consideration per share as paid by us
under the tender offer.

AeroAstro.In October 2007, we sold our approximately 8% interest in AeroAstro Inc.
(AeroAstro) to Raydne Corporation for approximately $1.4 million. AeroAstro is a U.S.
company engaged in micro and nano spacecraft applications for satellite systems and
components.

Ferranti.In July 2007, we acquired the entire share capital of the U.K. company
Ferranti Technologies (Group) Limited (Ferranti) for approximately $31 million. Ferranti,
based in Oldham, U.K., is an established supplier of engineering, manufacturing and product
support solutions to the aerospace and defense markets. It designs and manufactures
electronic, power and control solutions with emphasis on reliable operation in harsh
climatic and electromagnetic environments. Ferranti’s customer logistic support
services cover repair, overhaul, modification, integrated logistic support and post-design
services. Ferranti provides enhanced access and support to our customers in the U.K. and
Europe.

Fighter, trainers and transport aircraft and helicopters require advanced
electronic and electro-optic systems to perform their complex missions accurately, reliably
and efficiently. Our airborne systems are used in upgrading and modernizing fighter
aircraft and helicopters, extending the useful life of a fleet and provide a cost-effective
alternative to replacing existing equipment. Our systems are also installed as original
equipment in new aircraft.

Aircraft and helicopter upgrade programs are a part of our business
strategy. We have implemented this strategy over the past several years in major upgrade
programs for existing aircraft and helicopters.

C-130 J Digital Map.In January 2008, ESA was
awarded a contract by Lockheed Martin for the development of a digital map for the C-130J
to replace the older production units. This program has production options for deliveries
through 2011.

T-38. In August 2007, Elbit Systems received a
contract from Turkish Aircraft Industries for supply of avionics equipment for the T-38
modernization program of the Turkish Air Force. The avionics package includes various
displays and a comprehensive logistic package. Deliveries are to be completed through
2012.

IAR 99. In 2004, Elbit Systems, in cooperation
with the Romanian aircraft manufacturer Avioane Craiova, was awarded a contract from the
Romanian Defense Ministry to supply eight IAR-99 lead-in trainer aircraft. In January 2007,
the contract was increased to add logistic support elements. The project is being executed
in cooperation with Romanian industries, and we anticipate completing deliveries during
2008.

F-18 Displays. In 2004, ESA was awarded a
contract from Boeing for the design and development of Upfront Control Display and
Multi-Purpose Color Display units for F/A-18E/F aircraft. Under the terms of the contract,
ESA is providing form, fit, function and interface replacements of the existing aircraft
configuration in support of the F/A-18E/F Multi-Year II program, taking place through 2009.
The contract award provides options for production units of up to 360 aircraft. The first
of these production options was awarded to ESA in 2004, with additional options awarded in
2006 and 2007.

AL-X Brazil. In 2002, Elbit Systems was awarded
contracts by the Brazilian Government and by a subsidiary of the Brazilian aircraft company
Embraer – Empresa Brasileira de Aeronautica S.A. (Embraer) for the production and
logistic support phases of the AL-X Super Tucano aircraft program for the Brazilian Air
Force. Under the contracts we supply avionics systems, equipment and logistic support for
76 AL-X light attack and trainer aircraft being manufactured by Embraer for the Brazilian
Air Force. This followed our completion of a development contract for the AL-X. We began
delivering equipment for production aircraft in 2004. In January 2007, the Brazilian
Government and Embraer exercised options for avionic systems for an additional 23 AL-X
aircraft. Deliveries are scheduled through 2009. The avionics system for the AL-X includes
an advanced mission computer, liquid crystal displays, head-up display, navigation system,
digital video recorder and embedded GPS/INS radio altimeter. In addition, we are supplying
simulators, planning mission stations and debriefing stations. Maintenance and logistic
support to the Brazilian Air Force are provided mainly through our Brazilian subsidiary
AEL. Program funding is provided in part through a financing arrangement between the
Brazilian Government and commercial banks.

Colombia AL-X.In 2006, Elbit Systems received
a contract from Embraer for the supply of avionic systems for 25 AL-X Super Tucano aircraft
to be supplied by Embraer to the Colombian Air Force. Deliveries are scheduled to occur
through 2009.

F-5 Brazil. In 2001, Elbit Systems began work
under contracts for the Brazilian F-5 Aircraft Modernization Program. The program calls for
the upgrade of 46 F-5 aircraft for the Brazilian Air Force. Our contracts for the program
are with Embraer and the Brazilian Government, with a total value of approximately $230
million to be performed over an eight-year period. The contract with Embraer provides for
an avionics upgrade, which includes an EW suite, mission computers, helmet mounted system,
radar, displays and other avionics products.Delivery of production aircraft began in 2005. In January 2007, Elbit
Systems was awarded an additional order to integrate further advanced capabilities in the
F-5 aircraft. The contract with the Brazilian Government covers a logistic support program
including establishment of an in-country maintenance center based at AEL. Program funding
is provided through a financing arrangement between the Brazilian Government and commercial
banks. We obtained an insurance policy from the Israeli Foreign Trade Risk Insurance
Company covering up to 90% of our financial exposure under the program, subject to the
policy’s terms.

37

Pampa. In 2001, Elbit Systems signed a contract
with Lockheed Martin Aircraft Argentina S.A. for the avionics upgrade of 24 AT-63 Pampa
aircraft for the Argentinean Air Force. We completed production deliveries during 2007, and
in the first quarter of 2008 we received additional orders for spare parts.

F-16 Programs

For more than two decades, we have supplied numerous customers with systems
and electronic components for F-16 aircraft. We have supplied systems for the IAF’s
entire F-16 fleet. In addition, we have received a number of contracts from the U.S.
Government, Lockheed Martin, the prime contractor of the F-16, and others, to supply
electronic and electro-optic systems for F-16 aircraft used by the USAF and other air
forces.

In recent years, Elbit Systems, ESA, Elop and Cyclone have received a number
of orders to supply additional systems and equipment, as well as to repair equipment, for
F-16 aircraft of the IAF and other Lockheed Martin customers. We are supplying a wide range
of items to Lockheed Martin for the new IAF F-16 aircraft (F-16I). These items include
mission computers, helmet mounted systems, head-up displays, display systems, stores
management systems, structural assemblies and other equipment.

In recent years, ESA was awarded F-16 related contracts to develop and
supply the commercial central interface unit, color multi-function display systems and a
digital video recorder. ESA also is supplying advanced air to ground, air to air and
emergency jettison remote interface units to Lockheed Martin for an F-16 customer and
supplies commercial data entry electronic units (CDEEU) for the F-16. In 2004, ESA was
awarded a contract by the USAF to provide more than 2,000 CDEEUs for F-16 Block 40-50
aircraft and upgrade of pre-Block 40 F-16 aircraft. The contract is being performed over a
four-year period. Also, in 2005, ESA was awarded a five-year multiple products, multiple
quantity repair and maintenance contract from the USAF for various F-16 avionics
components. In 2006, ESA was awarded a five-year contract by the USAF to provide depot
level repair support for the Wide Angle Conventional HUD.

In April 2008, Lockheed Martin selected Elop to supply new generation
head-up displays for new F-16 aircraft. Elop has been supplying the head-up display for the
F-16I since 2001. Elop also supplies aerial reconnaissance systems for the F-16 for oblique
photography.

Since its 2005 acquisition of the assets of IMI’s Aviation Systems
Division, Cyclone manufacturers pylons for F-16 aircraft. Also, for a number of years
Cyclone has manufactured the leading edge flap for U.S. Air Force F-16 aircraft. In January
2007, Cyclone was awarded a contract by Lockheed Martin to supply structural components for
F-16 aircraft ordered by the Hellenic (Greek) Air Force, including leading edge flaps
horizontal stabilizers, ventral fins, rudders and center line pylons. Deliveries are
scheduled through 2008.

As of December 31, 2007, our overall F-16 related systems and components
backlog, which extends through 2010, totaled approximately $115 million.

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Fighter Aircraft Structural Components and Fuel Tanks.In December 2007, Cyclone was awarded an initial contract from the USN to
supply 300-gallon fuel tanks to be installed on F-18 aircraft. Deliveries are schedule to
take place through 2013. In 2006, Cyclone was awarded a contract by Boeing for structural
components for Boeing’s F-15 aircraft, including external fuel tanks, pylons,
horizontal stabilizers and gun access doors. Deliveries are scheduled to be completed in
2009.

Aircraft Electro-Optic
Systems.Elop supplies laser
range-finders for a range of airborne platforms. Elop also has supplied laser designators
for other airborne applications such as the laser designator for the U.S. Apache and the
French Tiger helicopters, the USN’s Nite Hawk pod and for pods of other
customers.

Aerial Reconnaissance
Systems.Elop supplies airborne
reconnaissance systems for a range of fighter aircraft including the F-16. In 2005, Elop
was awarded a contract by the Republic of Korea Air Force (ROKAF) to supply real-time EO/IR
long-range oblique images systems for ROKAF F-16 aircraft. The contract is to be performed
over a three-year period. A program to supply airborne systems for the Turkish Air Force
ceased in 2006, subject to mutually acceptable provisions, and Elop was invited to compete
on a similar program with updated requirements.

HALBIT Joint Venture. In May 2007, Elbit
Systems, Hindustan Aeronautics Ltd. (HAL) and MerlinHawk Associates Private Limited
established HALBIT Avionics Private Limited (HALBIT) as an Indian joint venture company.
HALBIT, in which we hold a 26% interest, was established to jointly market, design and
integrate avionics and simulator products in the Indian market and other agreed
markets.

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Helicopter Upgrade Programs

OH-58D Displays.In January 2008, ESA was
awarded a contract by the U.S. Army to replace the current displays with a new 5X7
display for the OH-58D helicopter. This order is for the production of up to 650 displays
with deliveries through 2010.

Korean Helicopter Upgrades.In 2006, Elbit
Systems was awarded a contract by Korean Aerospace Industries Ltd. to provide technical
assistance for a Korean helicopter upgrade program, to be performed through 2011. Also, in
2006, Elbit Systems was awarded a contract by the Korean Ministry of National Defense to
perform portions of a large scale project for helicopters upgrades. The contract is being
performed over a three-year period.

Romanian Helicopter Upgrade Programs. In 2005,
Elbit System won two contracts to upgrade helicopters to NATO standards for the Romanian
Air Force and Navy. The contracts, which are being performed in cooperation with the
Romanian aircraft manufacturer IAR S.A. Brasov, are being performed over a three-year
period.

IAF Mission Management System. In 2005, Elbit
Systems was awarded a contract to provide the IAF with a command and control mission
management system for helicopter platforms. This advanced system provides combat forces
with a real-time updated situational picture, which enables them to share mission critical
data based on data communications. The system allows all mission participants to benefit
from an accurate tactical picture for enhanced situational awareness, as well as effective
synchronized operation on the battlefield. The system enables support coordination,
identification of friendly forces and prevention of inadvertent
gunfire.Follow-on orders were received
for additional capabilities with deliveries extending through 2009.

Apache Mission Computer. In 2004, ESA was
selected by Boeing to design a new mission computer for the Apache AH-64 helicopter. The
contract was completed in 2006. In March 2007, ESA received a follow-on master development
and production contract for integration of the mission processor on the Apache Block 3
program, with development deliveries to be completed in 2008.

Turkish S-70 Blackhawk. In 2003, Elbit Systems
received a contract from Turkish Aerospace Industries for the modernization of the Turkish
Armed Forces Command Sikorsky S-70 Blackhawk helicopters. We act as the avionics systems
integrator and are developing and supplying “glass cockpit” avionics and
advanced mission equipment. The program is being performed in two stages, development and
production, over a six-year period.

V-22 Digital Map and Display Systems. We supply
both digital maps and multi-function display systems for the U.S. Armed Forces’ V-22
Osprey tilt rotor aircraft (V-22). Our digital map provides pilots with real-time high
resolution digital topographical images and other information pilots need to perform their
missions. Over the last several years Boeing has awarded ESA V-22 related contracts for the
development and supply of the digital map system, a contract for the Active Matrix Liquid
Crystal Multi-function Display Upgrade Program, a series of interface units, redesign of
the display electronic unit and digital map and production orders for second generation
digital map and display electronics. In 2005, ESA was awarded a development contract for
the second generation of the V-22 primary flight display, and in 2006 and 2007 ESA received
additional production of orders for various V-22 items, including interface units, digital
maps, displays, display electronics and head-up displays.

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Digital Maps and Displays for Eurocopter. In
2003, we received a contract from Eurocopter S.A. (Eurocopter) to develop and supply flight
displays systems for French search and rescue helicopters. Deliveries under orders received
to date under this contract are being made through 2009. This followed earlier contracts
from Eurocopter for display development and supply of digital map systems and
displays.

Electro-Optic Products for
Helicopters.Elop supplies
several products for heliborne applications. These include laser range-finders and target
designators including those based on solid state diode pumped laser technology. In 2002,
Elop was awarded a contract to develop and supply its Laser Obstacle Ranging & Display
Systems (LORD) for IAF helicopters, which has successfully completed its advanced
multi-functional flight test series. Performance of the contract is through 2008. In 2005,
Elop’s LORD system received Flight International’s Aerospace Industry Award in
the Avionics and Electronics category. Elop and ESA have completed the development of a
common laser designator for both the upgrade of the Gun-Ship C-130H aircraft and the TSS
Hawkeye Cobra AH-Z helicopter. Elop also supplies the laser-spot tracker integrated with
the fire-control system, as well as display monitors, for the AH-64 Apache helicopter. ESA
supplies the upgraded FLIR enhanced night targeting system for the USMC’s AH-IW Super
Cobra helicopters. Elop also supplies electro-optic payloads for a variety of
helicopters,such as the Sea King,
Cheetah, Mi-17 and Mi-24.

Precision Guidance Systems

OPHER and Lizard. In the area of guided
munitions, we developed and are supplying our “Whizzard” family of precision
guided systems. The Whizzard family includes the “OPHER” and
“Lizard” systems. OPHER is a thermal-imaging, autonomous precision guidance
system. The Lizard system provides munitions guidance towards laser designated
targets.We have supplied OPHER systems
to customers such as the IDF, the Italian Air Force and the Romanian Air Force and are
currently supplying Lizard systems to the Italian Air Force. In March 2007, Elbit Systems
was awarded a contract to supply Lizard systems for the IAF that were delivered during
2007. In October 2007, Elbit Systems was awarded a follow-on order for deliveries during
2008.

JDAM. In 2004, ESA was awarded an order from
Boeing to modify a Lizard Semi-Active Laser (SAL) seeker to serve as the SAL seeker for
Boeing’s JDAM munitions, adding the capability of laser terminal guidance against
targets of opportunity and moving targets. The laser JDAM development program has been
completed with a successful test conducted by the USAF and USN. ESA was awarded a
production contract by Boeing for laser seekers in May 2007, with deliveries scheduled
through 2012. During 2008, ESA will be supporting Boeing in a follow-on USN competition for
the Direct Attack Moving Target Capability weapon.

Viper Strike. In 2003, under an order received
by ESA from Northrop Grumman Corporation (NG), our semi-active laser seeker was
successfully tested with NG’s brilliant anti-tank (BAT) munitions – Viper
Strike. Orders for additional units were received through 2006. These munitions are used in
connection with the Hunter UAV, the Predator UAV and the AC-130 gunship. New derivatives of
this product are being modified for use on other platforms, with ESA is continuing
deliveries of Viper Strike seekers through 2008.

We provide a range of aircraft flight training solutions and operation of
training aircraft on private financing initiative (PFI) and “power by the hour”
(PBH) arrangements.

41

In February 2007, Elbit Systems was awarded a contract to establish a
training center for “Tzofit” (King Air B200 Beechcraft) for the IAF. The
training center operates through a PFI program, with Elbit Systems providing the IAF a
turn-key solution including the establishment of the training center, its operation and the
supply of simulators, training services and maintenance for a ten-year period. The IMOD
purchases from Elbit Systems flight training hours for the IAF. The center is established
on civilian property, and for the first time in Israel such a training center also serves
civilian pilots, providing them training in accordance with international aviation
requirements while using local flight simulators and facilities.

In 2004, Cyclone was awarded a ten-year contract from the IMOD for the
operation and maintenance of the helicopters of the IAF Flight School. Under the contract,
which is executed by providing flight hours on a PBH basis, Cyclone provides full
maintenance services to the IAF Bell 206 and Bell 209 Cobra AH-1A helicopters.

In 2002, Snunit Aviation Services Ltd., an Israeli company established by
Elbit Systems and Cyclone, was awarded a contract for the supply and operation of the Grob
120A light trainer aircraft for the IAF. The contract for operation of the aircraft is for
ten years and was the first PFI program adopted by the IAF. Under the PFI concept, we
purchase, own, maintain and operate the aircraft and make them available to the IAF, who is
charged according to flight hours.

We provide tactical, virtual and embedded training and simulation programs
offering across-the-board systems engineering and integration expertise applied to a
comprehensive line of training and simulation solutions for airborne platforms. These
solutions range from mission preparation, through execution, to post-mission debriefing and
analysis. Our total solution concept encompasses ground support systems, including mission
planning and debriefing for pre-and-post multi-mission rehearsal and review.

Our training systems include virtual training systems such as the Advanced
Combat Training System (ACTS) for fixed-wing aircraft and HeliACTS for helicopter crew
training. We also supply live, virtual and constructive training systems. In addition, we
offer comprehensive simulator support services such as contractor logistics support (CLS),
training, manuals and spare parts.

In 2006, Elbit Systems was awarded a contract by the IMOD to supply the
avionics simulation system, cockpit and visual system for the IAF’s F-16I aircrew
flight and system trainer. This contract is being performed in cooperation with Lockheed
Martin and is to be completed over a two-year period. We also supply simulators for
aircraft such as the F-16A, F-16C/D, Puma, ALX, F-4E, F-5, Mi-8, Mi-24, Sea-King, MiG-21,
IAR 99 and Mirage 2000.

We provide logistic support services for fixed-wing aircraft and helicopters
such as repair, maintenance and supply of spare parts to the IAF and other customers, often
as a part of our upgrade and other programs. Acquisitions in recent years have added to our
logistic support capabilities for a wide range of aircraft in Israel, the United States,
Brazil and for other customers.

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Cyclone performs various levels of maintenance services for a number of
types of military and commercial aircraft and helicopters. Its facilities near Karmiel,
Israel include hangars and a runway. Cyclone also has a license to use another runway and
facilities in Israel for aircraft maintenance for the IAF. In May 2007, Cyclone assumed
responsibility for maintenance activities for the Israeli Police helicopters on a PBH basis
for a two-year period. The maintenance is done at the Police facilities and is subject to
the Israeli CAA rules and regulations.

At ESA in Alabama, Georgia and Texas, we repair and maintain electronic
systems and components for aircraft, helicopters and ground support equipment for U.S. and
other customers. ESA also assists customers in establishing the appropriate level of
maintenance and repair close to the user to improve operational readiness. At AEL in Porto
Alegre, Brazil, we are implementing a logistic support center for our aircraft
modernization programs for the Brazilian Air Force.

In 2007, our revenues from flight training services, services relating to
training and simulators and logistic support services were not significant.

Helmet Mounted Systems

Fighter Aircraft Helmet Mounted Systems

DASH.Our pilot helmet mounted systems are in
operation with a number of customers throughout the world. Over the last 20 years we have
been designing and manufacturing Display and Sight Helmet (DASH) systems. DASH allows the
pilot to target the weapons systems by looking at the target and also displays flight
information on the helmet’s visor. The DASH system has been purchased by the IMOD for
the IAF’s F-15I and F-16I aircraft, as well as by other customers.

Since 2000, VSI has received several contracts from Boeing and Lockheed
Martin to supply production quantities of the Joint Helmet Mounted Cueing System (JHMCS)
and associated development and integration efforts. The JHMCS was developed under contracts
awarded by Boeing and Lockheed Martin to VSI. It is used in USAF and ANG F-15 and F-16 and
USN F/A-18 fighter aircraft and has been successfully flown in all three aircraft types.
The JHMCS provides visual information to the pilot and other crew members, based on the
position and orientation of the operator’s head. The JHMCS provides the pilot with
“first look, first shot” high off-boresight weapons engagement capabilities.
The system enables the pilot to accurately cue onboard weapons and sensors against enemy
aircraft and ground targets without the need to aggressively turn the aircraft or place the
target in the head-up display for designation. Critical information and symbology, such as
targeting cues and aircraft performance parameters, are graphically displayed directly on
the pilot’s visor.

Starting in 2004, VSI has been awarded several contracts by Boeing for Low
Rate Initial Production and Full Rate Production (FRP) lots for the JHMCS. Contracts were
awarded in 2006, to meet FRP Lot 3 requirements. These orders fulfill U.S. Government
domestic requirements for USAF F-15 and F-16, ANG F-15 AND USN F/A-18 Single Seat and Dual
Seat platforms, as well as FMS production and spare commitments. In October 2007, VSI
received additional orders to meet FRP Lot 4 requirements. As of April 30, 2008, VSI is
supplying JHMCS to 22 countries. VSI also received direct contracts from the USN and USAF
for spares and test equipment in support of the JHMCS. The contracts are to be completed
through 2009. These orders bring VSI’s total JHMCS production quantity to more than
3,200 systems ordered, with approximately 2,500 systems delivered as of April 30,
2008.

ESA’s facilities in Talladega serve as the depot repair center for the
JHMCS electronics unit.

JSF. In 2003, VSI was awarded a contract by
Lockheed Martin to develop the helmet mounted system for the U.S. F-35 Joint Strike Fighter
(JSF) Program. The contract was increased in 2005 to a total of approximately $156 million.
VSI supported the successful JSF prototype flight test in April 2007, which included the
helmet mounted display system, and the majority of the development effort is scheduled to
be completed in 2008, with continuing support activities through 2012. The JSF helmet
mounted display system is expected to contain the most advanced helmet mounted display ever
designed and will be used as the aircraft’s primary flight and weapon delivery
system. In October 2007, the JSF helmet was assessed in the RAFCAM Hawk aircraft at
Boscombe Down in the U.K.

NVCD. In 2006, VSI was awarded two contracts by
the USN and USAF to supply the Night Vision Cueing and Display System (NVCD), which
includes Panoramic Night Vision Goggles (PNVG) for evaluation and test flight by USN and
USAF tactical aircraft. The PNVG is based on the “Quad Eye”™ product
developed by ESA.

In 2005, ESA was awarded a framework Indefinite Delivery / Indefinite
Quantity (IDIQ) contract by the DOD to supply ANVIS/HUD® systems for U.S. Army utility
helicopters and other DOD rotary-wing platforms. Under this contract, the U.S. Army may
place purchase orders with ESA for ANVIS/HUD® systems from time to time over a
five-year period for up to the aggregate amount of the contract. Over the past fifteen
years Elbit Systems and ESA have supplied more than 4,000 NVG/HUD systems for a variety of
U.S. Army and other U.S. Armed Forces’ programs.

The NVG/HUD is operational in the IAF, having been integrated into various
assault and attack helicopters. In recent years, we also received contracts to supply
NVG/HUD systems for customers and end users in Korea, Australia, Canada, the U.K. and other
countries. In June 2007, Elbit Systems was awarded two contract for ANVIS HUD® systems
from two NATO countries. In 2002, ESA was selected to supply NVG/HUDs for the Agusta 129
helicopter over a five-year period.

ARH.In 2005, ESA was selected by Bell
Helicopter to provide the Helmet Display Tracking System (HDTS), also referred as Aviator
Night Vision Imaging System/Head-Up Display for 24 hours a day (ANVIS/HUD® 24), for the
U.S. Army’s Armed Reconnaissance Helicopter (ARH) program. Under ESA’s contract
with Bell Helicopter, ESA is supplying the HDTS for each ARH aircraft ordered by the U.S.
Army from Bell Helicopter that contains an HDTS requirement, up to 500 aircraft. The ARH
Program currently forecasts a production quantity of approximately 500 aircraft over a
seven-year period. In 2006, ESA was selected to provide two additional systems for ARH,
including the data transfer system and the rocket interface unit. The Limited User Test for
the ARH was satisfactorily completed in March 2008.

IHADSS. In 2000, ESA acquired Honeywell’s
display and orientation products business, which mainly included supply of the Integrated
Helmet Display and Sighting System (IHADSS) for the U.S. Army and other users of Apache
helicopters and for the Italian-made Agusta 129 helicopter. The ESA Warner Robins Support
Center provides depot level repair support for all IHADSS customers. In 2002, Boeing
awarded ESA the IHADSS 21 contract to upgrade the AH-64 Apache IHADSS with new electronics
to achieve increased image resolution to accommodate longer range thermal imaging systems
being developed for the AH-64. Transition to full-rate production is ongoing, with Lot I
scheduled to begin during 2008.

Several of the entities in the Company are engaged in the design,
development and manufacture of a range of systems and products for the commercial and
general aviation markets. This includes products for business jets, very light jets, search
and rescue and transport helicopters and other general aviation platforms.

As part of its Vision-Based CockpitTM concept, ESA designs and
produces the All Weather Window®Enhanced Vision
System (EVS) for commercial aircraft. The EVS utilizes an advanced FLIR system developed
together with Opgal. EVS projects an image on the pilot’s head-up display, providing
FLIR picture overlaying the outside view in a conformal manner. It is designed to improve
flight safety and situational awareness and allows the pilot to detect lights and ground
features such as runways, aircraft and buildings at night and in low visibility conditions.
Since receiving U.S. Federal Aviation Administration (FAA) certification in 2001 for the
installation of the EVS on General Dynamics’ Gulfstream-550 business jet,
EVS is installed as standard equipment on Gulfstream-400, 450, 500 and 550
aircraft and is an option on Gulfstream G-150, G-200 and G-350 aircraft. In 2006, ESA was
awarded additional follow-on orders for EVS by Gulfstream for all Gulfstream large cabin
aircraft models. EVS II, the second generation Enhanced Vision System, was certified on the
Gulfstream G-350 through G-550 aircraft in December 2007 and will be phased into production
during 2008.

During 2006, ESA’s EVS was awarded the New Hampshire High Technology
Council’s Product of the Year Award. In 2003, EVS was selected for installation on
FedEx Express’ Boeing MD-10 and MD-11 and Airbus A300 and A310 aircraft fleet.
Certification was received in March 2008, with installations on aircraft beginning in
mid-2008. EVS II was also selected by Jetcraft Corp. for the retrofit business jet
market.

AALC Program.In 2006, ESA teamed with BAE Systems in support of the Air Force Research
Laboratory (AFRL) Autonomous Approach and Landing Capability (AALC) program. The AALC
program is a funded technology demonstration program by AFRL and industry to develop a
sensor, database and display system that provides Air Force Air Mobility Command aircraft
crews the ability to land at prepared and semi-prepared airfields in zero ceiling/zero
runway visual range meteorological conditions. The meteorological conditions can include
rain, fog, snow, dust, sand and other suspended and blowing particles. ESA is responsible
for providing an integrated short wave infrared and medium wave infrared sensor for fusion
with BAE Systems’ 94 GHz radar image for the head-down display and head-up
display.

Sandel. In 2006, ESA acquired a 20%
interest in Sandel, a U.S. company engaged in the development and production of specialized
integrated display systems and other products, primarily for the general aviation market.
Sandel’s product line includes a terrain avoidance warning system and an electronic
horizontal situation indicator, among others. ESA intends to integrate some of its recent
commercial aviation products with Sandel’s displays for the general aviation market.
ESA has an option that expires in the fourth quarter of 2008 to acquire the balance of the
shares of Sandel.

GAViSTM.The GAViSTM is a small, light weight, low cost, infrared based
vision system for general aviation aircraft. It is a single aerodynamic unit that mounts
like an antenna on the top or bottom of the aircraft and provides the pilot with increased
situation awareness with a real-time video image on a head down display at night and in
some other low visibility conditions. In March 2008, Piaggio America and Jetworks Air
Center selected GAViS™ for the Avanti aircraft, with certification scheduled during
2008. In 2006, Grob Aerospace of Germany selected the Kollsman GAViSTM for the
Grob SPn light utility business jet. The GAViS™ has been certified on a Citation 550
aircraft and has received product parts manufacture approval. GAViS™ is in full
production.

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Commercial HUDs. In 2003, ESA entered
into a contract with Honeywell International Inc. to develop and supply, together with
Elop, head-up display overhead projection units for the Federal Express (FedEx) fleet. The
contract calls for deliveries through 2012. In November 2007, a new Advanced Technology
Head-Up Display was selected by Jetcraft Corp. for the retrofit business jet market and is
scheduled to be certified during 2009. During 2007, the FedEx head-up display was certified
on the FedEx aircraft fleet.

Cabin Pressurization Control System. In
April 2007, ESA’s next generation autoschedule cabin pressurization control system,
KAPS™ II, was selected by Diamond Aircraft for its D-Jet program. In March 2007, the
KAPS™ II system was selected by Cessna for its CJ 4 aircraft program. In 2004, the
KAPSTM II system was selected by Cessna for a multi-year contract for the
Mustang aircraft and was certified in August 2007.

Commercial Avionics Instrumentation
Products.ESA designs and
manufactures a range of altimeters, pressure monitors, other cockpit indicators and
avionics test equipment for commercial as well as military aircraft. ESA is also supplying
air data computers and air data pressure probes for commercial aircraft.

Civil Avionics Systems. In 2006, Elbit
Systems was awarded a long-term contract to supply civil avionics systems over an
approximately ten-year period.

Avionics for Commercial Helicopters.
Elbit Systems develops and supplies digital maps, displays and other avionic products for
commercial helicopters such as the EC-225 and others.

Aerostructure Parts. Cyclone
manufactures structural parts based on metal and composite technologies for several types
of commercial aircraft, including the Airbus 340 and Boeing 737, 747, 767 and
“Dreamliner” 787 passenger jets. In March 2008, Cyclone was awarded a contract
by Spirit AeroSystems to supply entrance and cargo doors for commercial aircraft. The
contract, in an amount of approximately $160 million, calls for deliveries between 2009 and
2016. In February 2007, Cyclone was awarded a contract by Spirit AeroSystems to supply
engine blocker doors for commercial jets, with deliveries through 2011.

Recent advances in technology and extensive use of UAS in Afghanistan and
Iraq by Allied Forces have resulted in an increased demand for UAVs for many military
applications, particularly in the area of ISR. The spectrum of our UAS and related
technology provides solutions for a broad range of operational requirements. This resulted
in the rapid growth of our UAS business in recent years (more than tripling our sales since
2004).

We develop and manufacture several types of UAV platforms for the IDF and
other customers. These include the Hermes® family of UAVs, including the Hermes®
1500, Hermes® 900, the Hermes® 450 and the Hermes® 180, as well as the
Skylark® UAV family of Skylark® I and Skylark® II.

The Hermes® 1500 is a medium altitude long endurance (MALE) UAV for
maritime patrol and other types of support missions.The Hermes® 900 is a tactical MALE
UAS designed for various missions with combined payloads. The Hermes® 450 supplies
real-time intelligence data to ground forces. We have developed a number of recent
modifications and variants to the Hermes® 450 system. These modifications and variants
provide extended capabilities. The Hermes® 180 is a tactical short-range UAV designed
for brigade-level intelligence, surveillance, target acquisition and reconnaissance (ISTAR)
missions.

We also are involved in smaller UAVs, such as the Skylark® I and II. The
Skylark® I is an electrically propelled and highly covert short-range UAS providing
ISTAR capabilities to company – brigade-level tactical echelons. Skylark® II,
which is currently under contract for development, expands the range of ISTAR capabilities
and endurance of the Skylark® family.

We also develop and supply ground control stations for the operation of
UAVs. In addition, we supply to the IDF and other customers the latest generation of
surveillance UAVs, based on the Hermes® 450. Our U.K. subsidiary, UEL Engines Ltd.,
produces engines for UAVs. In April 2008, we upgraded our Hermes® 450 UAV to include a
R902 Wankel rotary technology based engine, providing capability for the UAV to carry
multiple payloads with extended endurance.

In 2005,U-TacS, Elbit
Systems’ 51%-owned UK subsidiary, was awarded an approximately $500 million contract
as part of the U.K. Ministry of Defence’s (UK MOD) Watchkeeper program. U-TacS’
contract was awarded by Thales UK, the prime contractor for the Watchkeeper program, and is
to be performed over an approximately eight-year period. U-TacS subcontracted with Elbit
Systems for approximately one-third of the value of U-TacS’ contract with
Thales.

The Watchkeeper program will provide the U.K. Armed Forces with ISTAR
capability based on our Hermes® 450 UAS and will be a key component of the U.K.’s
Network Enabled Capability (NEC). The program calls for the delivery of equipment, training
and facilities, with the capability of coming into service starting in 2010.

Under the Watchkeeper program, the U.K. Armed Forces will be provided with
all weather day and night surveillance in times of war, tension or during peace-keeping
operations without the need to deploy troops into sensitive areas or harmful situations.
The Watchkeeper program system can provide continuous 24/7 surveillance when needed, using
UAVs able to stay airborne for extended periods.

The Watchkeeper program system consists of the WK450 UAV carrying a
stabilized payload incorporating day/night sensors and laser target designator connected by
a data link to a network of containerized ground control stations where operators will
control the entire mission and interface within a network enabled environment. High
resolution optical and radar imagery will be exploited and disseminated to provide valuable
intelligence for operational commanders. The system is capable of rapid deployment and
operations anywhere in the world. In April 2008, the first flight of the WK 450 was
successfully conducted.

In 2005, U-TacS selected Elop as the subcontractor, together with Thales UK
Land and Joint Systems, to supply Elop’s CoMPASS™ advanced observation system
payload for the Watchkeeper program.

As of December 31, 2007, we had a backlog for the Watchkeeper program of
approximately $436 million, to be performed mainly through 2011.

Lydian. In June 2007, U-TacS was awarded an
approximately $110 million contract to perform the U.K. MOD Lydian Program. The program
provides service-based support to an ISTAR capability in two overseas theatres. The support
is intended to include the provision of a Hermes® 450 UAS, training of the U.K. MOD
staff in use and maintenance of the system and the provision of contractor logistic support
(CLS) and program management services.

IUP.In 2005, IUP,
a partnership equally owned by Elbit Systems and IAI, was awarded an approximately $150
million contract to supply UAS for the Turkish TUAV Program. Under the contract IUP is
delivering UAS including advanced payloads. IUP is subcontracting 50% of the work under its
contract to Elbit Systems, which is supplying ground controlstations, data links and
payloads, to be delivered over a four-year period.

Skylark®II
.In April 2008, Skylark®II
conducted its first flight demonstration for the U.S. Armed Forces. In December 2007, Elbit
Systems was selected by the Korean Government to supply the Skylark®II UAS. In June
2007, Skylark®II was selected by the consulting and research organization Frost &
Sullivan for its “Best Innovative Product Award for 2007 in the Aviation Defense
Category.” In 2006, Skylark®II received Popular Science’s “2006 Best
of What’s New” Award in the Aviation and Space category.

Skylark®I.In March 2008, we received a
contract from France’s Special Forces to supply Skylark®I mini-UAS. In recent
years, the Canadian Army, the Netherlands Army, the Swedish Army and several other
customers placed orders for Skylark®I systems, thus establishing a leading market
position globally in this class of UAVs. In 2005, Elbit Systems was awarded a contract to
supply six Skylark®I systems for rapid deployment by the Australian Army. The
deliveries were made during 2006, and in April 2007 the Australian Army placed orders for
additional systems. In 2004, the IMOD selected Elbit Systems to supply several
Skylark®I systems for operational evaluation by the IDF ground forces. The system
deliveries were completed, and the systems are now in an operational evaluation
phase.

IMOD Integrated Program. Elbit Systems
received contracts from the Israeli Government to act as the prime contractor under a
program to develop and supply integrated defense electronic systems. We completed the first
phase of this program in 2002. During 2002 through 2004, we received additional orders for
deliveries through 2010. In November 2007, we received a new UAV order for the Israeli
Defense Forces (IDF). The order includes the development, manufacture and supply of new and
improved UAS, as well as the upgrade of existing UAS, designed to enhance and expand the
IDF’s existing UAV platform. Development and supply is scheduled to take place over a
four-year period.

Airborne C4ISR.In 2004, Elbit Systems was awarded a contract in an amount of approximately
US$300 million by the IMOD to supply advanced systems. The contract is being performed over
a multi-year period, under which Elbit Systems will supply airborne systems and command and
control systems. The contract includes integration of various systems, part of whose
purpose includes providing advanced solutions in the area of homeland security. As of
December 31, 2007, we had a backlog for the program of approximately $141 million to be
performed mainly through 2009, with support activities through 2011.

Silver Arrow. Silver Arrow LP (Silver Arrow),
is an Israeli limited partnership owned by Elbit Systems together with a wholly-owned
holding company subsidiary of Elbit Systems. It is located in Nes Ziona, Israel and
develops and manufactures UAVs.

UEL - UAV Engines Ltd., a wholly-owned British
subsidiary of Silver Arrow, manufactures engines for UAVs and other
applications.

Over the past three decades, we have worked with the Israeli Navy to develop
high capability naval command and control, electro-optic, communications, EW and training
systems for surface ship and submarine applications. These systems are currently being used
by the Israeli Navy and several other navies throughout the world. We also develop unmanned
surface vessels.

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C4I Systems.For more than ten years, we have been the prime contractor for the C4I
system for the Israeli Navy SAAR 5 corvette class missile boat. We also developed and
supply the anti-missile decoy countermeasure launching system for the SAAR 5
program.

Trainers and Simulators. We develop
advanced naval training simulators. Our simulators address the need to improve training due
to the high cost of activating naval forces. Our naval training systems provide realistic
simulations of combat conditions at sea. They are used in on-shore facilities for training
in naval tactical command decision procedures, anti-submarine warfare and electronic
warfare. Our training systems are currently used by the Israeli Navy and several other
navies. Our naval training and simulator systems include naval tactics and commander
trainers, naval operational trainers, electronic warfare trainers and anti-submarine
trainers.

Electro-Optic Systems. Elop supplies
electro-optic products for naval applications to several customers.Elop also supplies electro-optic shipboard payloads to several navy and
maritime forces for both observation and fire control applications. In 2006, Elop was
awarded a follow-on contract for the supply of additional CoMPASS™ systems to a
European Navy. Deliveries were completed in 2007.

Elbit Systems has developed and supplied several naval electronic
intelligence systems. The systems are designed to detect and recognize threats under a wide
range of conditions and to initiate automatic countermeasures to protect ships against
enemy missiles. Our systems equip the Israeli Navy Dolphin class submarines and are
installed on board submarines of several navies worldwide. In 2001, Elbit Systems was
awarded a contract by the German shipyard Howaldtswerke Deutsche Werft (HDW) to supply our
Timnex II EW system for submarines, and the systems were delivered in 2003. An additional
system was ordered in 2004, and deliveries were completed during 2007. In April 2007, Elbit
Systems was awarded an additional contract by HDW for two systems for the new Dolphin class
submarines ordered by the Israeli Navy. In January 2008, Elbit Systems received orders for
additional ESM systems to be installed on an overseas customer’s frigates.
Furthermore, in 2006, two additional systems were ordered by an overseas
customer.

Elisra supplies a range of systems for a variety of shipboard EW, threat
detection and intelligence applications. Elisra’s EW suites equip all Israeli Navy
ships and are designed to perform threat detection and intelligence applications.
Elisra’s naval systems also initiate automatic coordinated countermeasures to protect
ships against enemy missiles as well as active anti-missile protection.

The survivability of tanks and other combat vehicles on the modern
battlefield depends largely on their ability to achieve a first-round hit. This requires
the gunner to quickly and accurately coordinate many complex tasks with a large number of
variables. We were one of the first companies to introduce modern electronic technology in
tank applications using our expertise in developing advanced avionics systems to adapt and
to develop control systems and electronics for combat vehicles. We replaced manually
operated fire control systems with an advanced digital tank fire control system, improving
on-the-move hit probability and reducing the time required for targeting.

For over twenty years, we have been developing and supplying a family of
fire control systems for new and upgraded main battle tanks, medium and light tanks and
light armored vehicles. Our systems integration expertise and extensive experience in
developing and manufacturing these systems led to an expansion into a new generation of
tank turret drive systems. We developed an electric gun and turret drive and stabilization
system that can be integrated with the fire control system to improve turret stabilization
and accuracy. This, in turn, improves fire-on-the-move performance.

We develop unmanned turrets and overhead remote controlled weapon stations
that transform armored vehicles into armored fighting vehicles by providing the crew with
combat capabilities of a turreted vehicle – including guns, anti-tank missiles and
capabilities to perform in harsh battlefield conditions. In addition, we developed the
“See-Through-Armor” (STA) system, a cutting edge panoramic observation system
designed to provide the vehicle crew with an omni-directional combat scene when the
platform hatches are closed. The STA system provides a 360° view around the vehicle,
which is critical in urban environments.

Elop is a long time developer and producer of electro-optic systems for
combat vehicles in Israel and abroad. These systems include eye safe laser range-finders,
second generation thermal imaging systems, gunners’ sights with or without
line-of-sight stabilization, commander panoramic sights, computers and sensors. We supply
our integrated battle management systems as part of our modern fire control systems sold to
the IDF and to other customers around the world. We also furnish combat vehicle logistic
support services to the IDF.

All of the models of the most advanced IDF battle tank, the Merkava, use our
fire control and electric gun and turret drive and stabilization systems as original
equipment. We are both a prime and a subcontractor for the supply of systems to various
Merkava tank models, and we are the integrator for the Merkava MK electronic and electric
turret systems. Elbit Systems, Elop and Kinetics are supplying a significant number of
systems for the IDF’s most advanced Merkava tank, the MK-4. These systems include the
day/night gunner and commander sighting systems, the electronic gun and turret drive
system, flat panel displays, advanced warning systems against laser guided threats, life
support systems, a battle management system and laser warning
systems.

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In 2006 and 2007, we were awarded several orders for the development and
supply of electronic and optical systems and electrical drive systems for the Merkava. In
January 2007, we were awarded an order to supply additional electronic and electro-optical
systems for the ongoing production of the Merkava MK-4. We are the prime contractor to the
IMOD for all Merkava tank fire control systems. We also are supplying the upgrade of the
firing computer of the IDF’s Merkava and M-60 tanks. Kinetics also supplies several
systems, including the life support system, for Merkava programs. As of December 31, 2007,
we had a total of approximately $147 million in our backlog relating to Merkava orders, to
be supplied mainly through 2009, with additional supplies through 2010.

Land Vehicle Modernization Programs

Turkish M-60 Modernization Program.In 2004,
Elbit Systems was awarded a contract for the Turkish Army M60A1 Tank Modernization program.
The contract, in the amount of approximately $183 million, was signed with the IMOD, with
deliveries to be completed over an approximately five-year period. The contract is for the
supply of electronic and electro-optical fire control systems, electrical gun and turret
drive systems and support equipment for the program. The Prototype System Approval Tests of
the tank were successfully completed in 2006. The program is now in the serial production
phase. Our contract is being performed within the framework of the agreement for the
program between Israel Military Industries Ltd. and the Turkish Ministry of
Defense.

Multiple Launch Rocket System (MLRS) and High Mobility Artillery Rocket
System (HIMARS).ESA is a subcontractor to Lockheed Martin
for the U.S. Army MLRS M270A1 upgrade program. ESA supplies the fire control system that
includes an on-board computer processor, a 14-inch color flat panel display, a mass storage
device and a keyboard. ESA completed production deliveries in 2004 and is performing
ongoing retrofit activities. In 2006, ESA received additional orders from Lockheed Martin
for MLRS production systems as well as to develop a new generation gunner display unit for
the MLRS. The equipment developed for MLRS is also directly compatible with the HIMARS used
by the U.S. Army and the USMC. In 2006, ESA received a production order for systems for the
HIMARS. Additional orders were received during 2007.

Bradley A-3 Program. ESA is a subcontractor for
the U.S. Army Bradley A-3 fighting vehicle modernization program. ESA was awarded contracts
by United Defense (now BAE Systems), the prime contractor for the program, to develop and
supply the turret and hull processors, the gunners’ and commanders’ hand
stations, the position interface box and the map operational software. During 2005 - 2007,
ESA was awarded additional orders for Bradley systems for the U.S. Army’s ongoing
operations in Afghanistan and Iraq.

USMC LAV.In 2005, ESA was awarded a
demonstration contract by Lockheed Martin as part of the Lockheed Martin team for the
development of an upgrade of the command and control variant of the USMC’s Light
Armored Vehicle (LAV). The demonstration contract was completed in 2006, with ESA providing
an integrated mission equipment package for the LAV C2 variant. Following completion of the
demonstration program ESA participated in the phase 2 development and was responsible for
the design, manufacturing and support of the LAV’s complete mission equipment
package. The development was performed in 2007, culminating in a successful operational
test in March 2008.

Integrated Land Systems Upgrade Programs. In
August 2007, Elbit Systems was awarded contracts in a total amount of approximately $163
million for the supply of tank and artillery systems upgrades for customers in the Asian
countries. The projects include upgrading of fire control and command and control systems
for tanks and artillery systems, with deliveries to be performed through 2009.

Slovenia Armored Vehicle Program.In July 2007,
Elbit Systems was selected to supply overhead remote controlled weapon stations and
unmanned turrets as well as other electronic and electro-optical systems and components for
the Slovenia Armored Vehicle program. The items are to be installed on board Patria AMV 8x8
vehicles. Deliveries under the contract are scheduled to take place through
2011.

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Romanian Vehicle Program.In July 2007, Elbit
Systems was awarded a contract to supply unmanned turrets and electro-optic systems,
including the Driver Thermal Viewer, to be installed on Piranha III vehicles supplied by
the Swiss company Mowag of the General Dynamics European Land Combat Systems Company
(Mowag) to the Romanian Government. Deliveries are scheduled through 2010.

Portuguese Army Program. In 2006, Elbit Systems
was awarded a contract to supply unmanned turret systems, fire control systems and
additional land systems to the Portuguese Army. The contract was entered into with STEYR
Austria (STEYR), a member of the General Dynamics European Land Combat Systems Company, the
prime contractor for the Portuguese program. The systems supplied by Elbit Systems are
integrated in STEYR’s Pandor II 8x8 light wheeled armored vehicles and will
facilitate rapid force mobility and deployment by the Portuguese Army. Under this program
Elbit Systems is providing a fully integrated configuration for
fighting/patrol/surveillance vehicles, including unmanned turrets equipped with missiles,
automatic 120 mm mortars, fire control and threat detection systems. Deliveries under the
contract are scheduled to take place through 2010.

Belgian Armored Infantry Vehicle Program. In
January 2007, Elbit Systems was awarded a contract to supply unmanned turrets and
electro-optic systems for the Belgian Armored Infantry Vehicle program. The contract is
pursuant to a cooperation between Elbit Systems and Mowag. Mowag is supplying its Piranha
III vehicles for the program. Elbit Systems’ portion of the program includes the
delivery of 30 mm unmanned turrets as well as several opto-electronic and electronic
subsystems. Deliveries under the contract are scheduled to take place through
2010.

In January 2008, Elop was awarded several contracts from international
customers for the supply of CORAL and CORAL-CR hand-held lightweight thermal imaging
cameras. The contracts include applications for infantry, scouts and special units, night
sight and target acquisition, security and perimeter defense for infantry commanders.
During the first part of 2007, Elop was awarded several contracts to supply Coral-type
hand-held thermal imaging systems for long-range observation and reconnaissance to the
Canadian and Israeli armed forces as well as for other international customers.

In 2006, Elop was awarded a contract by the Samsung-Thales Company to supply
thermal imaging kits for the gunner periscope sights of the Korean K1A1 Tank. The contract
is to be performed over a four-year period. Also in 2006, Elop was awarded a contract to
supply Portable Lightweight Designator /Rangefinders (PLDR) and Coral thermal imagers to
the German Armed Forces. Deliveries are to be completed in 2008.

In September 2006, Elop was awarded a contract in the amount of
approximately $130 million to develop and manufacture electronic land systems for a foreign
customer. The project also includes logistic support for the systems and is to be performed
over a five-year period.

In 2005, ESA was awarded initial orders to provide high performance thermal
binocular system long-range thermal imagers (LRTI) for the USMC. The LRTI is a portable
binocular, hand-held battery-operated thermal imager for long-range observation and
reconnaissance and is based on an Elop design. Deliveries for the initial orders placed by
the USMC System Command under an IDIQ contract were completed during 2007. Under the IDIQ
contract the U.S. Government may purchase up to 5,000 LRTIs as well as spare parts,
contractor maintenance and training items over a five-year period. In December 2007, ESA
was awarded additional orders under the IDIQ contract for thermal laser spot imagers for
the USMC for deliveries through 2009.

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Elop sells thermal imaging systems for the Leopard 2/A5 and other tanks. In
addition Elop has sold thousands of hand-held thermal imagers and thermal imager
kits.

Laser Warning Systems.Elbit Systems is supplying laser warning systems for ground vehicles to
several European countries.

Training Systems and Simulators. Elbit
Systems and ESA have supplied tank gunnery training systems to the IDF and the U.S. Army.
We have fielded the Deployable Range Training and Safety System (DRTSS) to the U.S. Army at
the Forts Hood, Carson, and Stewart tank gunnery ranges. This system provides real-time
crew gunnery evaluation, recorded after action video, battle status assessment, positive
target recognition and ammunition conservation as well as reduces friendly fire casualties.
In addition, we supply ground forces trainers to other customers worldwide including the
Appended Tactical Combat Trainer System, Tactical Battle Company Trainers, Artillery
Training Centers and the Conduct of Fire Trainer.

Environmental Control and Hydraulic
Systems.Kinetics develops
advanced life support systems, including environmental and climate control and NBC
protection systems, for combat vehicles. Kinetics also develops and manufactures hydraulic,
fuel, braking and suspension systems as well as an auxiliary power unit for combat vehicles
of the IDF, the U.S. Army and other customers. Kinetics’ U.S. subsidiary is
delivering environmental and climate control systems for the U.S. Army and USMC MRAP
vehicles.

Unmanned Ground Vehicles
(UGVs).Elbit Systems and Elop are involved in the development of robotic unmanned
ground vehicles (UGVs) for defense and homeland security applications. Elbit Systems’
UGVs are deployed by the IDF for patrolling missions. In March 2007, the Israeli Antitrust
Commission approved the establishment of a joint venture by Elbit Systems and IAI to
develop a next generation UGV for various applications related to security missions and
border control. In December 2007, Elbit Systems and IAI signed a joint venture agreement
for the establishment of a jointly-owned company for the development of the above-mentioned
next generation UGV. In January 2008, Elbit Systems established the new company, G-NIUS
Unmanned Ground Systems Ltd. (G-NIUS). Until receipt by IAI of the governmental approvals
required by IAI for holding shares of G-NIUS, G-NIUS will be owned by Elbit Systems, and
IAI was granted options to purchase shares of G-NIUS in an equal number to those of Elbit
Systems. Such options will be exercised upon receipt by IAI of the required
approvals.

C4I and Government Information Systems

Nature of Our C4I and Government Information
Systems.We design our C4I and
battlefield systems to manage the growing amount of data supplied by information systems
and sensors in defense, border control, crime prevention and other government intelligence
gathering applications. This is an area of growing importance in light of increased
priority for communications among defense forces and the growing need of many governments
for anti-terrorism measures, such as ISR, access control and integrated intelligence
gathering. Our C4I battlefield and information systems process and interpret data received
from the different sources and present it in a user-friendly format. We integrate advanced
software tools with general and special purpose hardware into full C4I battlefield and
information technology systems.

Our land C4I and battlefield management systems are supplied through
turn-key projects for tactical command and control. We provide solutions from the level of
individual fighting vehicles, mortars and artillery to the divisional and headquarters
command level. Our systems are based on hardware and software building blocks, including
tactical computers, modems, communication controllers, data radios, military WLAN radios
and digital map systems among others. We also provide products for facilitating operations
in the battlefield based on commercial off-the-shelf technology (COTS).

Digital Infantry Soldier. In March 2007, Elbit
Systems received an order from the IMOD to develop and provide a battle management solution
and full digital soldier combat suit for infantry, to be performed through 2009.

Israel Digital Army Program.In 2004, Elbit
Systems was awarded a contract by the IMOD for the Digital Army Program (DAP), in an amount
of approximately $200 million, which has since been supplemented by additional orders. The
DAP, is being performed over a ten-year period. Elbit Systems is the prime contractor for
the DAP. Rafael and Tadiran Systems are serving as our major subcontractors. In September
2007, funding approval was finalized for a total of approximately $300 million for the U.S.
Foreign Military Funding (FMF) portion of the DAP. The FMF portion of the DAP is being
performed by ESA as well as other U.S. subcontractors. Within the framework of the program,
all land forces operations are being computerized (command, control, and communications),
integrated and interfaced with new and advanced applications. Under the DAP, we are
supplying the IDF with computerized systems down to the single soldier level. The systems
facilitate transmission of integrated, real-time situation pictures to and from all
battlefield and command echelons. The program calls for supply and support of all hardware
and software, including command and control stations, data processing and distribution
systems. It will enable force coordination at all levels, access to updated situational
pictures, improved overall operational capabilities, including survivability and accuracy,
and more efficient utilization of personnel and other resources. As of December 31, 2007,
we had a total DAP backlog of approximately $425 million, to be performed mainly through
2013.

TORC2H®. Elbit Systems’ TORC2H®
border protection command and control system has been supplied to the IDF, and Elbit
Systems has successfully deployed the TORC2H® to support border security activities in
Israel. Further phases of TORC2H® are anticipated to be implemented under the scope of
the DAP. In 2005, Elbit Systems fielded a TORC2H® version which was used operationally
by the IDF during the disengagement from the Gaza Strip. We also received in 2005 an
additional order under the TORC2H® program calling for deliveries through
2009.

Netherlands Battle Management Systems. In
January 2008, Elbit Systems was awarded a contract to supply advanced Battlefield
Management Systems (BMS) to the Royal Netherlands Army Ground Forces. The BMS includes
enhanced tactical computers incorporating tactical communications devices and data
communications software, for installation on tanks and armored vehicles. Deliveries are to
be made through 2013.

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IDF BMS. In 2002, Elbit Systems
was awarded a contract by the IMOD to serve as prime contractor for the IDF’s BMS for
Battalion Combat Teams program. The program includes the development, supply and
support of advanced electro-optical sensors, multi-functional displays, command and control
software, information and dissemination systems and advanced mission computers. The program
enables coordination among the IDF’s main battlefield tanks, armored fighting
vehicles and infantry fighting vehicles. It provides situational awareness to maneuvering
forces and improves the overall operational capabilities of fighting units. The first phase
of the program, including initial deployment, was completed. Elbit Systems received
additional orders under the scope of the Battle Management Systems for Battalion Combat
Teams, to be performed through 2010.

ETC. In July 2007, Elbit Systems was awarded a
contract for the supply of enhanced tactical computers (ETCs) and other commercial and
control systems to an Asian country. The contract will be performed through 2011. The IDF
has selected Elbit Systems to develop and deliver ETCs, which serve as the hardware
building blocks for the IDF’s ground command and control systems. These building
blocks are based on high performance military computers, “ruggedization” of
COTS circuit boards for application in harsh military environments, as well as specialized
displays and communication controllers for higher echelon levels. The ETCs are equipped
with several types of communication interfaces and powerful display features. We also
develop, manufacture and supply ETCs to a number of customers worldwide.

Anti-Money Laundering System. In 2003, Elbit
Systems was awarded a contract for the development and support of an information processing
system for the Israeli Money Laundering Prohibition Authority (IMPA). The system was
successfully fielded and is currently operational by IMPA. The project is anticipated to be
completed in 2008. The project provides IMPA with an information technology system that
includes a database and a collection center for relevant data from financial institutions
such as banks, insurance companies and customs authorities. The project includes the
management of an official data base containing the currency transactions and suspicious
activities reports submitted to IMPA by the Israeli financial community, as well as reports
of enrichment from governmental law enforcement and information resources and from
corresponding governmental financial intelligence units in other countries.

Through TadComm and our Land and C4I operations in Israel and ESA’s
C4I solutions activities in the U.S., we provide a range of tactical communications
solutions for armed forces throughout the world.

With over 40 years of experience in military communications, TadComm has
established expertise in diverse areas of military communications. These include
advanced radio design, development and production in frequencies ranging from 1.5 MHz to 5
GHz, featuring high grade built-in crypto algorithms and electronic counter - counter
measures techniques (e.g. frequency hopping and direct sequence) for reliable
communications under severe battle environments. TadComm also provides quality modems to
serve the increasing demand for C4I data communications; multi-channel line-of-sight
frequency hopping wide-band radio equipment for reliable inter-command posts
communications; tactical terminals/military computers and communication controllers; as
well as tactical internet based integrated communication systems providing communication
from headquarters to any point in the battle-space for effective command and
control.

We supply tactical radio systems to a wide range of customers throughout the
world. Examples of our recent contract awards in this area include the
following:

In May 2008, TadComm received a $127 million contract from a European
customer to supply tactical communications radio equipment and systems. The systems include
high frequency (HF) and very high frequency (VHF) tactical radio equipment designed for use
by ground forces for data transfer and voice communications. The project will be performed
over a 17-month period.

In July 2007, Telefunken RACOMS in Germany was awarded a contract for the
supply of advanced tactical communications equipment for a European customer, with
deliveries through 2012. In 2006, TadComm signed a contract with a Latin American customer
to supply advanced tactical radio communications equipment and system elements, which was
completed in 2007. In 2005, TadComm entered into an agreement with an Asian customer to
supply HF and VHF tactical radios. Deliveries were completed during 2007. In 2004,
Talla-Tech, was awarded a five-year IDIQ contract from the U.S. Army CECOM, for the support
and improvement of SINCGARS radios.

In 2004, Elbit Systems was awarded a contract by the IMOD to develop a
Wireless LAN solution for the IDF. This solution is based on commercial standards which are
adapted and tailored to military tactical needs and
environments.

In 2002, TadComm was awarded a contract to develop the IDF’s new
generation tactical radio system. In 2005 and 2007, TadComm was awarded contracts from the
IDF for the supply of new generation tactical radio systems. Deliveries of the new radios
are scheduled to begin in 2009, following completion of the development.

Bro@dNet Communication System. In 2005,
TadComm was awarded a contract from the IDF to supply a point-to-multi-point, high-capacity
broadband, IP-based, data communications system based on wireless broadband WiMAX
technology. The implementation of the system is scheduled to be completed during
2009.

USMC Rugged Computers. In July and
October 2007, Talla-Tech received purchase orders from the USMC to supply its RPDA-57
Rugged Personal Digital Assistant as well as Tacter 31M products. The RPDA is a rugged
hand-held computer and will facilitate situational awareness to dismounted Marines and
soldiers. Tacter 31M is a hand-held or vehicle mounted multi-purpose ruggedized computer
designed to serve all combat echelons.

UHF SATCOM Power
Amplifiers.In December 2007,
Talla-Com was awarded a contract from DOD agencies to supply UHF SATCOM (satellite
communications) power amplifiers.

Elop has more than 70 years of experience in the field of electro-optics and
designs and manufactures electro-optic systems and products for defense, space, homeland
security and commercial applications worldwide. This includes expertise in thermal imaging,
laser systems, optronic stabilized payloads, ground integrated sights, robotic sensors,
head-up displays, space and airborne reconnaissance systems, IMINT solutions and
electro-optic countermeasures. These systems are supplied for spaceborne, airborne, land
and naval applications as described above.

COMPASS™ Payloads.In February 2008, Elop was awarded two contracts by foreign customers for
supply of Micro-COMPASS™ (Micro Compact Multi-Purpose Advanced Stabilized Systems)
payloads for coast guard applications. The payloads are to be installed on a variety of
marine platforms with deliveries to be completed during 2008. In July 2007, Elop was
awarded a multi-year contract by a foreign customer to supply the COMPASS™
electro-optical payloads for attack and utility helicopters. In 2006, Elop was awarded
several new contracts to supply advanced CoMPASS™ payloads for naval and aerial use,
to be supplied over a four-year period. In 2005, Elop was selected to supply its
CoMPASS™ advanced observation system payload for the UK Watchkeeper program. See
above “UAS – UAV Programs – Watchkeeper Program.”

PLDR. In February 2007, ESA received two
follow-on orders from the USMC for its high-performance Portable Laser Designator Ranger
(PLDR) systems that have proven successful in field test evaluations. This followed an
initial award in 2006, under a five-year IDIQ contract by the USMC for a PLDR based on an
Elop developed product.

In May 2008, Elop and ELSEC were awarded a total of three contracts from a
customer in Asia for the supply of cooled thermal imaging systems for reconnaissance and
target acquisition applications. The contracts will be performed over a two-year
period.

Elop and ESA are involved in the development and supply of payload based
observation and fire control systems for naval and airborne platforms, including day and
night vision, laser range-finders and designators and integrated sights for ground forces.
In November 2007, ESA received an IDIQ contract form the USMC to supply thermal laser spot
imagers over a five-year period.

In July 2007, ESA received an IDIQ contract from the U.S. Naval Inventory
Control Point for repair/mediation of various Night Targeting Systems components in support
of the USMC AH-IW helicopters. This work will be performed through 2012.

Elop supplies advanced IMINT systems to various customers internationally.
Elop also supplies to customers worldwide a range of hand-held, surveillance and homeland
security and armored vehicle applications of thermal imaging products and
systems.

These products and systems are further described above in “Military
Aircraft and Helicopter Systems,” “Naval Systems,” and “Land
Vehicle Systems” and below in “Homeland Security Systems.”

Space Cameras.Elop is actively expanding space
applications for its technology and products. Elop has developed a variety of cameras for
the Ofek Satellite, including the Ofek-3, Ofek-5 and Ofek-7, and for other initiatives of
the Israel Space Agency. In 2006, EROS B, a commercial reconnaissance satellite, was
launched and began transmitting images taken by an advanced high resolution camera
developed by Elop. This followed Elop’s supply of an advanced digital camera for the
EROS A satellite in 2000. EROS B and EROS A were launched by ImageSat International N.V. in
which Elop owns a minority interest. See below “Technology
Spin-Offs.”

Tauvex II.In 2004, Elop was awarded a contract
from the Israel Ministry of Science and Technology and the Israel Space Agency for the
supply of the “Tauvex II” (Tel-Aviv University Ultra-Violet Explorer)
scientific space telescope. The Tauvex II telescope will be launched into space mounted on
the Indian Satellite GSAT-4, for the purpose of scientific research in exploration of the
galaxies. The telescope is to be supplied for integration into the GSAT-4 during 2008. The
contract follows an agreement signed in 2003 between the Israel Space Agency and ISRO, the
Indian Space Research Organization, for scientific cooperation between the two countries in
the field of astronomy in the “Ultra-Violet” spectrum.

CNES. In 2005, CNES, the French Space Agency,
selected Elop for cooperation in the supply of a scientific electro-optical space camera
called Venus. The contract is for the production of the camera which will be mounted
on-board a micro-satellite. The contract followed a successful feasibility study by Elop.
The camera will be installed on a satellite resulting from a contract signed between the
Israel Space Agency and CNES. The camera is scheduled for integration into the
micro-satellite in 2009.

Hyperspectral Systems.Elop has been selected
by the IMOD to be Israel’s hyperspectral systems development house. Currently, Elop
is involved in an on-going hyperspectral system development program for the
IMOD.

OHB.Elop and OHB System A.G. of Germany each
own 50% of a German subsidiary, OHB Electro-Optics Gmbh, which pursues space-related
activities.

Homeland Security Systems

Nature of Our Homeland Security Systems.
We are involved in the homeland security market that includes airports, border control,
transportation, coastal authorities, urban crisis management and other critical
infrastructure facilities. These activities are a natural extension of our expertise gained
in the development of our C4I and battlefield management systems, UAVs and electro-optic
systems and communication systems. National and local governments are allocating greater
resources in this area in light of increasing terrorist threats around the world. This has
led to increased opportunities for systems and products that meet the growing demand for
perimeter and homeland security solutions.

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ELSEC, as well as Elbit Systems and Elop, develop and supply detection
sensors and other products for facility security, border and coastal control and perimeter
protection in Israel and numerous other countries. ESA leads the Company’s homeland
security business in the U.S. market. Products in this area include thermal imaging
detection systems, remote controlled surveillance systems, communication products and smart
perimeter protection systems. We are also involved in the field of aviation and
transportation security applications and are investing in future fusion technologies for
passenger screening at border gates and transportation terminals.

Customers in this field include the Israeli Ministry of Transportation, the
IMOD, the U.S. Department of Homeland Security and several international defense forces and
security organizations, including airport, border guard and coastal control authorities.
ELSEC is a supplier of E-fences and surveillance electro-optic day/night sensors to the
IMOD, as well as coastal surveillance systems, surveillance vehicles, airport security
systems and boarder surveillance systems to a variety of customers, mainly in
Europe.

SBInet.In
2006, the Boeing-led team, including ESA , was awarded the U.S. Secure Border Initiative
Project (the SBInet Project). The SBInet Project is designed to provide the U.S. Department
of Homeland Security with increased border security capabilities along a significant part
of the United States’ borders. ESA, as a team member to Boeing, has supplied,
together with ELSEC, LORROS® long-range observation systems for the SBInet
Project.

Perimeter Security.In 2006, ELSEC was
selected by the IMOD to deploy a “smart” electronic deterrence system. The
first phase of the project includes an electronic deference system to detect and assist in
preventing crossing attempts 24-hours a day, in all weather conditions. The contract
contains an option for the IMOD to significantly expand the system. The system is comprised
of advanced sensors, an electronic fence, communications and computerized command and
control posts. During 2003 and 2004, ELSEC was awarded contracts for a total of
approximately 50 kilometers of electronic perimeter systems for military bases and
municipalities. This followed Elbit Systems award from the IMOD of a contract to supply an
electronic warning systems “smart” fence, and Elbit Systems is executing that
program through ELSEC.

Mobile Surveillance Vehicles. In 2006,
ELSEC was awarded a project for the supply of mobile surveillance vehicles and advanced
cameras for the Ukraine Border Security Project. Deliveries were completed in 2007. These
vehicles include a command and control station, monitoring sensors and additional security
measures, allowing operation even in severe weather conditions. The vehicles can
accommodate three operators simultaneously.

Surveillance Towers. In March 2007,
ELSEC was awarded a project for the supply of surveillance towers for the border protection
of a European country. Deliveries are ongoing in 2008.

Airport Integrated Security
Systems. In August 2007, ELSEC
was awarded a contract to provide an airport security system for a European customer, with
deliveries to be completed in 2009. In 2006, ELSEC was awarded a contract to install a
comprehensive airport integrated security system in a European country. Deliveries were
completed in 2007. The system enables the integration of existing systems with new systems
and includes surveillance systems for short and medium-range, access control and sensitive
areas intruder detection. Also, the system is scalable to accommodate the customer’s
future requirements.

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Peripheral Coastal Security
Systems. In March 2007, Elbit
Systems was awarded a European Union funded contract for delivery and commissioning of an
integrated coastal surveillance system to Lithuania. Deliveries were completed in 2007. In
2006, ELSEC completed, for a customer in Asia, the deployment of its first peripheral
coastal security system. ELSEC’s contract for the project was awarded in 2005 and
includes additional stages for deployment of other locations in the customer’s
country. ELSEC’s coastal security system is remote controlled and enables its
operators to track a large number of vessels simultaneously, for dozens of miles, using
identification capabilities to send alerts regarding types of threats those vessels may
pose. The system includes advanced night vision sensors, daylight surveillance and laser
range-finders developed by Elop.

Israel Border Security Systems. In 2006,
Elbit Systems’ Border Control Management System for the Israeli Police was
inaugurated. The innovative system interfaces with all government and security agencies in
Israel, managing all entry and exit posts including airports, sea ports and land crossings.
Also, the Israeli National Border Control Registration System (BCRS) was developed by Elbit
Systems and has been fully operational since 2004. BCRS is a computerized system for
registration and control of Israel’s border crossing points. The system supports
border inspection processes and assists in the control of the passage of vehicles and goods
at all Israeli airports, seaports and land entry points.

MUSIC®.
Elop applied its defense based technologies to develop a Multi-Spectral Infrared
Countermeasure System (MUSIC®) for commercial aircraft applications in preventing
terrorism. MUSIC® enables identification of anti-aircraft shoulder-launched missiles
resulting in a break of the missile lock on the target. The Israeli Government is currently
reviewing the system for use in Israel’s civil aviation protection plan.

EW and SIGINT Systems

Through Elisra, in which Elbit Systems acquired a 70% interest in 2005, we
supply a range of multi-spectral self-protection suites for airborne combat platforms, as
well as modular SIGINT (ELINT, COMINT and DF) systems for air, ground and naval platforms
and applications.

Multi-Spectral, Self-Protection Suites for Airborne
Platforms. Elisra’s airborne platform self-protection
suites combine defense suites with electronic support measures. Its multi-spectral
self-protection solutions include passive IR missile warning systems for fighter aircraft,
helicopters, transport aircraft and maritime patrol aircraft. Elisra’s
self-protection suites include EW payloads with radar warning receivers, laser warning
receivers and other measures. During 2007, Elisra was awarded two contracts to supply EW
systems for international customers, with deliveries to take place through 2011. In 2006,
Elisra entered into a contract to supply full EW suites for fighter aircraft for an
international customer. The contract is to be performed over a multi-year
period.

Intelligence Systems. Elisra supplies
SIGINT systems designed for air, ground and naval platforms. These systems incorporate
cutting-edge digital receiving, signal processing and direction finding technologies.
During 2007, Elisra was awarded two contracts for the supply of SIGINT systems, with
deliveries to take place through 2009. In 2006, Tadiran Systems was awarded a contract for
the supply of EW systems to a European country. Deliveries are scheduled for completion in
2008. For UAVs Elisra provides systems that detect, identify and locate ground-based,
airborne, ground and ship-based emitters. See above “Naval Systems –
EW.”

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Data Links.Elisra’s subsidiary, Tadiran Spectralink, develops and supplies
advanced data links for airborne platforms, including UAVs and mini-UAVs, based on generic
modules to conform to the full range of modern data payload systems and to support high
rate digitalized analog data communications. Tadiran Spectralink also supplies tactical
video links that download video and telemetry data from UAVs providing real-time video data
to ground, airborne and naval forces, to enable comprehensive video networks.

Search and Rescue Solutions. Tadiran
Spectralink develops and provides advanced airborne search and rescue systems, supporting
the undetected, unimpeded first pass pick up of downed pilots and special forces within
enemy territory. Tadiran Spectralink also provides personal search and rescue radio sets
for non-combat use comprised of an emergency locator transmitter and a personal locator
beacon and a voice transceiver. In 2006, Tadiran Spectralink won a contract for the supply
of the advanced PSR-43G/SV Personal Survival Radio (PSR) to the German Air Force, with
deliveries to be made through 2008.

Several of the Company’s entities explore on an ongoing basis
potential spin-offs of their defense related technologies for commercial applications. Our
technology spin-offs are involved in intra-body navigation medical equipment, commercial
satellites and internet communications for commercial aviation, commercial communications
and microwave technologies. Several of our companies also engage in other commercial
activities. The following is a description of our main technology spin-offs and other
commercial activities.

MediGuide.Elbit Systems established MediGuide Inc. (MediGuide) in 2000 as a Delaware
corporation. MediGuide, through its wholly-owned Israeli subsidiary, leverages specific
technologies developed by Elbit Systems in the defense area for use in various medical
procedures and intra-body navigation. Elbit Systems provided MediGuide with an exclusive
license to use specific technologies for medical applications, and MediGuide provided Elbit
Systems with a cross license to use MediGuide’s developments for defense
applications. Outside equity investments have been made in MediGuide by venture capital
companies and strategic collaborators. As of April 30, 2008, Elbit Systems equity interest
in MediGuide, on a fully-diluted “as converted” basis, was approximately 41.5%.
In December 2007, MediGuide received a CE Mark certification for its gMPS™’s
system and GMC™ catheter. In January 2008, MediGuide entered into co-development of
medical positioning system (gMPS™) enabled products with Medtronic Inc. In April
2008, MediGuide initiated clinical trials in the U.S. under Investigational Device
Exemption approval from the U.S. Food and Drug Administration.

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Starling. Elbit Systems, Rafael
Development Corporation Ltd. (RDC) and Elron Electronics Industries Ltd. (Elron) own
Starling Advanced Communications Ltd. (Starling). Starling, an Israeli company, develops
products in the area of internet communications through satellite transmissions and
broadband information transfer for commercial aircraft. In May 2007, Starling issued an
initial public offering (IPO) on the TASE following which Starling became a publicly-traded
company in which Elbit Systems’ shareholdings were diluted from approximately 21% to
approximately 16% (approximately 10% on a fully-diluted basis). Starling’s 2007
annual financial statements indicated that its losses and negative equity raised an
uncertainty as to Starling's abililty to continue its operations as a going
concern.

ImageSat. Elop has an approximately 14%
equity interest and approximately 12.5% voting power in ImageSat International N.V.
(ImageSat). Other shareholders include IAI and private equity companies. ImageSat, which is
incorporated in the Netherlands Antilles, is involved in the operation of satellites for
commercial and other applications and providing satellite imagery. ImageSat’s
EROS A and EROS B satellites contain advanced high resolution cameras developed by Elop.
See above “Electro-Optics and Countermeasures Systems – Space Systems –
Space Cameras.” Also see below – Item 8. Financial Information – Legal
Proceedings – ImageSat.

Chip PC.In
2005, Elbit Systems acquired an approximately 20% interest (18.5% plus a loan convertible
into additional shares) in Chip PC Ltd. (Chip PC). Chip PC is an Israeli company located in
Haifa, Israel, engaged in the development and manufacture of “thin client”
solutions enabling server based computing technologies to replace traditional personal
computers and deploy and control large numbers of work stations. In July 2007, Chip PC
completed an IPO on the TASE. Following the IPO, Chip PC became a publicly-traded company,
in which Elbit Systems holds approximately 19% of its shares (16.3% on a fully diluted
basis). In addition, Elbit Systems holds an option to purchase up to an additional 5% of
Chip PC’s ordinary shares.

Other Commercial Activities. The Company
conducts a number of other activities in the commercial area. These activities include
medical equipment designed and produced by ESA through KMC, commercial communications and
mobile and wireless telephone network encryptions by business units in the Land and C4I
– Tadiran area, microwave technologies and components produced by Elisra and its
subsidiaries, night vision products for the automotive industry developed by an Elbit
Systems’ business unit, commercial automotive fleet management products by AEL in
Brazil and general manufacturing and machinery services by a number of Company entities,
including our Romanian subsidiary, Elmet International SRL.

Haifa vicinity: Our executive offices and main
research and development facilities are located on approximately 768,000 square feet of
property in the Advanced Technology Center in Haifa. We own approximately 311,000 square
feet of our main facilities in Haifa. The remainder of our facilities in Haifa is leased.
We also have ownership and long-term leasehold rights in a facility of approximately 65,000
square feet near our headquarters building in Haifa.

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Karmiel vicinity: We maintain manufacturing
operations in a leased facility of approximately 253,000 square feet in Karmiel. In May
2007, Elbit Systems entered into an agreement that provides an option to purchase the
Karmiel facility after a three-year period. Cyclone owns approximately 1,406,000 square
feet of property near Karmiel. This includes approximately 275,000 square feet on which
Cyclone’s offices, manufacturing, maintenance and hangar facilities are
located.

Rehovot/Nes Ziona: Elop owns or has long-term
leasehold rights to approximately 525,000 square feet, and leases on a shorter-term basis
approximately 5,000 square feet, of its facilities in Rehovot. These facilities contain
Elop’s headquarters, offices, development facilities and manufacturing operations.
Silver Arrow leases facilities in Nes Ziona, covering approximately 91,000 square
feet.A new building of approximately
64,000 square feet has been leased, and is planned to be occupied in September 2008. Land
and C4I - Tadiran leases approximately 7,500 square feet in Rehovot.

Petach Tikva: Land and C4I – Tadiran
leases approximately 80,000 square feet of offices and engineering facilities in Petach
Tikva.

Sderot: ELSEC owns approximately 109,000 square
feet of property in Sderot, which includes approximately 20,200 square feet of offices and
manufacturing facilities. ELSEC anticipates adding an additional 24,000 square feet of
office facilities by the first quarter of 2009.

Other U.S. Facilities.Our wholly-owned
subsidiary Elmec Inc., leases approximately 4,600 square feet of offices and warehouse
facilities in Chelmsford, Massachusetts. Real-Time Laboratories, Inc., a subsidiary of
Kinetics, leases approximately 20,000 square feet of offices and manufacturing facilities
in Boca Raton, Florida, and approximately 20,000 square feet of manufacturing facilities in
Choctaw, Mississippi.

Facilities in Other
Countries.AEL owns
approximately 282,000 square feet of property in Brazil, including offices and buildings
covering approximately 23,000 square feet. The European Subsidiary leases approximately
118,000 square feet in Belgium. In the U.K., Ferranti maintains freehold lease rights to
facilities of approximately 180,000 square feet; U-TacS leases approximately 3,800 square
feet, and UAV Engines leases approximately 13,000 square feet. Elmet and AE Electronics in
Romania lease approximately 91,000 square feet and 35,000 square feet, respectively.
Telefunken RACOMS, leases facilities in Germany of approximately 30,000 square
feet.

Recent Investment in
Facilities.Over the last two
years the average annual investment in our facilities, including building projects , as
well as equipment, machinery and vehicles, amounted to approximately $85 million. There are
no material plans to construct, expand or improve existing facilities, however, ongoing
improvements and minor expansions are planned at the facilities in Karmiel and Sderot,
Israel and in Fort Worth, Texas, in the U.S. Each of our manufacturing facilities generally
operate at or near full capacity. Accordingly, we believe that our current facilities are
adequate for our operations as now conducted.

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Governmental Regulation

Government Contracting Regulations.We
operate under laws, regulations and administrative rules governing defense contracts,
mainly in Israel and the United States. Some of these carry major penalty provisions for
non-compliance, including disqualification from participating in future contracts. In
addition, our participation in governmental procurement processes in Israel, the United
States and other countries is subject to specific regulations governing the conduct of the
procurement process.

Israeli Export Regulations.Israel’s defense export policy regulates the sale of a number of our
systems and products. Current Israeli policy encourages exports to approved customers of
defense systems and products such as ours, as long as the export is consistent with Israeli
Government policy. A license is required to initiate marketing activities. We also must
receive a specific export license for any hardware eventually exported from Israel. In
2007, approximately 50% of our revenue was derived from exports subject to Israeli export
regulations. In 2006, the Israeli Parliament (Knesset) passed a law regulating export of
“dual use” items (items that are typically sold in the commercial market but
that also may be used in the defense market) which entered into effect in January 2007. In
July 2007, a new Defense Export Control Law was passed by the Knesset, and the law’s
implementing regulations went into effect in February 2008. The new law enhances
enforcement of export control legislation, provides certain exemptions from license
requirements and broadens certain areas of licensing, particularly with respect to transfer
of technology.

U.S. and Other Export Regulations.ESA’s export of defense products, military technical data and
technical services to Israel and other countries is subject to applicable approvals of the
U.S. Government. Such approvals are typically in the form of an export license or a
technical assistance agreement (TAA). Other U.S. companies wishing to export defense
products or military related services and technology to our Israeli entities are also
required to obtain such export licenses and TAAs. This applies to data required by our
Israeli entities to perform work for U.S. programs. Licenses are also required for Israeli
nationals assigned to work in defense-related technical areas at our U.S. affiliated
companies. An application for an export license or a TAA requires disclosure of the
intended sales of the product and the use of the technology. In recent years, the U.S. has
implemented enhanced scrutiny of its export control regulations, and the U.S. Government
may deny an export authorization if it determines that a transaction is counter to U.S.
policy or national security. Other governments’ export regulations also affect our
business from time to time, particularly with respect to end user restrictions of our
suppliers’ governments.

The Israeli Defense Entities Law (Protection of Defense Interests) became
effective in 2006. Among other matters, this law establishes conditions for the approval of
an acquisition or transfer of control of an entity that is determined to be an Israeli
“defense entity” under the terms of the law. Designation as a “defense
entity” is to occur through an order to be issued jointly by the Israeli Prime
Minister, Defense Minister and Trade and Industry Minister. Although no such orders have
been issued as of the date of this Annual Report on Form 20-F, it is assumed that Elbit
Systems and most of our Israeli subsidiaries will be designated as “defense
entities” under the law. Elbit Systems and our major Israeli subsidiaries have been
designated as “defense entities” under an order of the Defense Minister with
respect to Israeli law governing various aspects of defense security
arrangements.

Orders to be issued under the Israeli Defense Entities Law will also
establish other conditions and restrictions. It is anticipated that in the case of a
publicly traded company such as Elbit Systems, Israeli government approval will be required
for acquisition of 25% or more of the voting securities or a smaller percentage of shares
that grant “means of control.” Means of control for purposes of the law include
the right to control the vote at a shareholders meeting or to appoint a director. Orders
relating to defense entities are also anticipated to, among other matters, (1) impose
restrictions on the ability of non-Israeli resident citizens to hold “means of
control” or to be able to “substantially influence” defense entities; (2)
require that senior officers of defense entities have appropriate Israeli security
clearances; (3) require that a defense entity headquarters be in Israel and (4) subject a
defense entity’s international joint ventures and various technology transfers to the
approval of the IMOD.

Approval of U.S. and Other Defense
Acquisitions. Many other countries also require governmental
approval of acquisitions of local defense companies or assets by foreign entities. Mergers
and acquisitions of defense related businesses in the U.S. are subject to the Foreign
Investment and National Security Act (FINSA) of 2007 that was implemented by Executive
Order in January 2008. Under FINSA, our acquisitions of defense related businesses in the
U.S. require review, and in some cases approval, by the Committee on Foreign Investment in
the United States (CFIUS).

“Buy American” Laws.The
U.S. “Buy American” laws impose price differentials or prohibitions on
procurement of products purchased under U.S. Government programs. The price differentials
or prohibitions apply to products that are not made in the United States or that do not
contain U.S. components making up at least 50% of the total cost of all components in the
product. However, a Memorandum of Agreement between the United States and Israeli
Governments waives the Buy American laws for specified products, including almost all the
products currently sold in the United States by Elbit Systems and our Israeli
subsidiaries.

Foreign Military Funding (FMF).ESA
participates in United States FMF programs. These programs require countries, including
Israel, receiving military aid from the United States to use the funds to purchase products
containing mainly U.S. origin components. In most cases, subcontracting under FMF contracts
to non-U.S. entities is not permitted. As a consequence, ESA generally either performs FMF
contracts itself or subcontracts with U.S. suppliers. The U.S. Government may authorize the
IMOD to utilize a portion of the FMF budget under the United States Subcontracting
Procurement (USSP) channel. In such cases, companies such as Elbit Systems or our Israeli
subsidiaries, who are acting as the Israeli prime contractor to the IMOD under the NIS
funded portion of an a IMOD program, are authorized to negotiate and enter into a
subcontract directly with a U.S. supplier. However, payment of the funds under a USSP
channel subcontract is administered by the IMOD Purchasing Mission to the U.S. ESA also
participates in U.S. Foreign Military Sales (FMS) programs.

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Antitrust Laws. Antitrust laws and
regulations in Israel, the United States and other countries often require governmental
approvals for transactions that are considered to limit competition. Such transactions may
include cooperative agreements for specific programs or areas, as well as mergers and
acquisitions. In connection with the acquisition of our interest in Elisra, the Israeli
Antitrust Authority imposed stringent conditions for us to meet so long as Elisra is
jointly held by us and IAI.

Civil Aviation
Regulations.Several of the
products sold by Company entities for commercial aviation applications are subject to
flight safety and airworthiness standards of the U.S. Federal Aviation Administration (FAA)
and similar civil aviation authorities in Israel, Europe and other countries.

As part of their standard contractual requirements for defense programs,
several of our customers include “buy-back” provisions. These provisions are
typically best efforts obligations to make, or to facilitate third parties to make,
specified transactions in the customer’s country. Such transactions may include the
purchase of local goods and services; cooperative ventures with, or investment in, local
entities; and transfers of equipment, infrastructure or know-how for the benefit of local
parties. In most cases, the buy-back transactions are to be fulfilled over a multi-year
period that in some cases extends after completion of deliveries under the
contract.

To date, we have not encountered significant difficulties in identifying
qualified local suppliers and placing purchase orders.

We typically have the right to apply multiplier factors in calculating the
amount of buy-back credit recognized, and certain types of investments and transactions
receive buy-back credit of up to several times the value of the specific transaction.
Therefore, even if the buy-back provisions apply in an aggregate amount of up to 100% of
the price of the contract with our customer, the actual effective buy-back obligation
amount in some cases could be significantly less due to the application of the multiplier
factors.

Although failure to meet a best efforts buy-back obligation may limit our
ability to be awarded future business from the applicable customer, in the majority of the
cases buy-back is not linked to delivery payments or subject to specific or material
contractual monetary penalties. The buy-back activities are a normal part of doing business
in the defense industry with these customers. Over the number of years that we have been
performing buy-back activities, we have not experienced significant difficulties in meeting
our buy-back obligations, and therefore these buy-back activities are not believed to
represent a material financial risk to our operations. Our maximum aggregate buy-back
undertakings as of December 31, 2007 were approximately $883 million, to be fulfilled over
a period of up to 10 years.

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Financing Terms

Types of Financing.There are several types of financing terms applicable to our defense
contracts. In some cases, we receive progress payments according to a percentage of the
cost incurred in performing the contract. Sometimes we receive advances from the customer
at the beginning of or during the course of the project, and sometimes we also receive
milestone payments for achievement of specific milestones. In some programs we extend
credit to the customer, sometimes based on receipt of guarantees or other security. In
other situations work is performed before receipt of the payment, which means that we
finance all or part of the project’s costs for various periods of time. Financing
arrangements may extend beyond the term of the contract’s performance. When we
believe it is necessary, we seek to protect all or part of our financial exposure by
letters of credit, insurance or other measures, although in some cases such measures may
not be available.

Advance Payment
Guarantees.In some cases where
we receive advances prior to incurring contract costs or making deliveries, the customer
may require guarantees against advances paid. These guarantees are issued either by
financial institutions or by us. We have received substantial advances from customers under
some of our contracts. Under certain circumstances, such as if a contract is canceled for
default and there has been an advance or progress payment, we may be required to return
payments to the customer as provided in the specific guarantee. As part of the guarantees
we provide to receive progress payments or advance payments, some of our customers require
us to transfer to them title in inventory acquired with such payments. As of December 31,
2007, the amount of guarantees relating to customer advances was approximately $748
million.

Performance Guarantees. A number of
projects require us to provide performance guarantees in an amount equal to a percentage of
the contract price. Some of our contracts contain clauses that impose penalties or reduce
the amount payable to us if there is a delay or failure in performing in accordance with
the contract or the completion of a phase of work, including in some cases during the
warranty period. These types of guarantees may remain in effect for a period of time after
completion of deliveries under the contract. Such guarantees are customary in defense
transactions, and we provide them in the normal course of our business. As of December 31,
2007, the balance of performance guarantees for Company entities amounted to approximately
$129 million.

Financial Risks Relating to Our
Projects. The nature of our projects and contracts creates
some potential financial risks, including risks relating to dependence on governmental
budgets, fixed price contracts for development effort and production, schedule extensions
beyond our control, termination for the customer’s convenience, potential for
monetary penalties for late deliveries or failure to perform in accordance with the
contract requirements and liability for subcontractors. In addition, we receive payments
for some of our projects in currencies other than U.S. dollars. In such cases, we sometimes
elect to adopt measures to reduce the risk of exchange rate fluctuations. See above –
Item 3. Key Information – Risk Factors.

Audit Regulations.The IMOD audits our
books and records relating to its contracts with us. Our books and records and other
aspects of projects related to U.S. defense contracts are subject to audit by the U.S.
Defense Contract Audit Agency. Such audits review compliance with applicable government
contracting cost accounting and other applicable standards. If discrepancies were found
this could result in a downward adjustment of the applicable contract’s price. Some
other customers have similar rights under specific contract provisions.

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Intellectual Property

Patents, Trademarks and Trade Secrets.The Company owns approximately 140 living patent families including patents
and applications registered or filed in Israel, the United States, the European Patent
Office and other countries. Our technology spin-off companies often rely in part on our
patented technology. We also hold approximately 40 living trademark families relating to
specific products. A significant part of our intellectual property assets relates to unique
applications of advanced software-based technologies, development processes and production
technologies. These applications are often not easily patentable, but are considered as our
trade secrets and proprietary information. We take a number of measures to safeguard our
intellectual property against infringement as well as to avoid infringement of other
parties’ intellectual property.

Governmental Customers’ Rights in Data.The IMOD usually retains specific rights to technologies and inventions
resulting from our performance under Israeli Government contracts. This generally includes
the right to disclose the information to third parties, including other defense contractors
that may be our competitors. Consistent with common practice in the defense industry,
approximately 35% of our revenues in 2007 was dependent on products incorporating
technology that a government customer may disclose to third parties. When the Israeli
Government funds research and development, it usually acquires rights to data and title to
inventions. We often may retain a non-exclusive license for such inventions. The Israeli
Government usually is entitled to receive royalties on export sales in relation to sales
resulting from government financed development. However, if only the end product is
purchased, we normally retain the principal rights to the technology. Sales of our products
to the U.S. Government and some other customers are subject to similar conditions. Subject
to applicable law, regulations and contract requirements, we attempt to maintain our
intellectual property rights and provide customers with the right to use the technology
only for the specific project under contract.

Licensing. There are relatively few
cases where we manufacture under license. In such cases, the licensor typically is entitled
to royalties or other types of compensation. In some cases where we have acquired business
lines we obtain a royalty free license to use the applicable technology for specified
applications. Occasionally, we license parts of our intellectual property to customers as
part of the requirements of a particular contract. We also sometimes license technology to
other companies for specific purposes or markets. Our technology spin-offs typically
receive licenses to use relevant parts of our intellectual property for their designated
business purposes. See above “Technology Spin-Offs – MediGuide and -
Starling.”

We invest in research and development (R&D) according to a long-term
plan based on estimated market needs. Our R&D efforts focus on anticipating operational
needs of our customers, achieving reduced time to market and increasing affordability. We
emphasize improving existing systems and products and developing new ones using emerging or
existing technologies.

We perform R&D projects to produce new systems for the IMOD and other
customers. These projects give us the opportunity to develop and test emerging
technologies. We developed new tools for fast prototyping for both the design and
development process. This permits the operational team members to effectively specify
requirements and to automatically transfer them into software code. Examples of our ongoing
defense-related R&D projects include those for night operation capabilities, laser
systems, display systems, helmet mounted systems, other avionics systems, UAVs, UGVs, USVs,
space based cameras, Recce systems, C4I systems, electric tank turret drive systems,
unmanned turret systems, communication systems and homeland security systems. We also
perform R&D in the area of commercial aviation and commercial night vision products for
automobiles. In addition, our technology spin-offs perform R&D in their areas of
operation, mainly in the fields of medial instrumentation and broadband
communications.

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We employ more than 3,800 software and hardware development and systems
engineers engaged in advance programs for airborne, ground and naval defense, homeland
security and space applications. In addition, most of our program and business line
managers have engineering backgrounds. More than 50% of our total workforce is engaged in
research, development and engineering.

Our customers fund part of our R&D, and we also invest in our research
and development activities. This investment is in accordance with our strategy and plan of
operations. The table below shows amounts we invested in R&D activities for the years
ended December 31, 2005, 2006 and 2007:

We manufacture and assemble most of our systems at Company operational
facilities in Israel, the U.S. and Europe. These facilities contain warehouses, electronic
manufacturing areas, test equipment and final assembly and test stations. We also have
mechanical workshops, fully automated surface mount technology lines and clean
rooms.We have fully independent
capabilities in electronic card assembly, electro-optic components, solid state components
integration, environmental testing and final testing, including space simulation and
thermal chambers. We also have computerized logistics systems for managing manufacturing
and material supply. At ESA’s facilities in Merrimack, we also manufacture commercial
avionics and medical equipment in U.S. FAA and FDA registered facilities.

We manufacture UAVs at our facilities in Karmiel, Israel and at UAS
operations in Rehovot, Israel. Cyclone performs manufacturing and assembly of composite
materials and other products at its facilities in Karmiel, Israel. SCD has a high
technology semiconductor manufacturing facility in Leshem, Israel, in which it performs
electronic integration and assembly of thermal imaging sensors and laser diodes. ESA has
facilities for manufacturing and repair of test equipment and other items. Some components
of our products are manufactured in Romania at S.C. A-E Electronics S.A., a majority-owned
Romanian subsidiary of Elbit Systems that manufactures metal parts and at Elmet
International SRL, a wholly-owned subsidiary of Elbit Systems involved in machining and
metal works.

The Company’s operational units each conduct purchasing activities. In
the U.S., in addition to the purchasing activities conducted by the ESA companies, Elmec
Inc., a wholly-owned subsidiary of Elbit Systems located in Chelmsford, Massachusetts, also
provides procurement services. A number of purchasing and related support and logistic
services are performed on a shared services basis by central service providers, in the
Company, for various Company units and entities.

We generally are not dependent on single sources of supply. We manage our
inventory according to project requirements. In some projects, specific major
subcontractors are designated by the customer. Raw materials used by us are generally
available from a range of suppliers internationally, and the prices of such materials are
generally not subject to volatility.

We invest in continuous improvement of processes to ensure customer
satisfaction throughout all stages of our operations. This includes development, design,
integration, manufacturing and services for software and hardware, for the range of our
systems and products. Our quality teams are involved in assuring compliance with processes
and administrating quality plans. These activities begin at the pre-contract stage and
continue through the customer’s acceptance of the product or services.

Elbit Systems uses a project management method based on Theory of
Constraints (TOC) in most of our development projects. Using advanced software, work plans
are continuously updated and are available to all integrated product team members. This
method makes management more efficient and improves our ability to meet schedule demands of
complex projects. Another TOC methodology is used successfully to manage our manufacturing
lines in Karmiel, Israel. We also use methods such as Kaizen and Lean.

Our processes are based on a cutting edge tool case and CAD-CAM tools. This
infrastructure, together with well defined development methodology and management tools,
assists us in providing high quality and on time implementation of projects.

Representatives of our customers generally test our products before
acceptance. Branches of the IDF and other customers have authorized us to conduct
acceptance testing of our products on their behalf. In addition, Elbit Systems and Tadiran
Spectralink are certified for Software Compatibility Maturity Model Integration (CMMI)
Level 3 of the U.S. Software Engineering Institute (SEI), indicating a high level of
program management and control, system engineering, software and hardware maturity and
development capability. Elbit Systems has an approval certificate of the European Aviation
Safety Agency (EASA) part 145 for maintaining civil products. Elbit Systems is certified
for ISO-9001:2000 including ISO-90003 for software, AS9100, ISO-14001 and OSHAS 18001.
Cyclone is certified for ISO-9001:2000, AS9100, ISO-14001 and OSHAS 18001. Elisra is
certified for ISO-9001:2000 including ISO-90003 for software, AS9100, ISO-14001 and OSHAS
18001. Tadiran Systems and Tadiran Spectralink are certified for ISO-9001:2000 and
ISO-90003 for software. All of the above are certified by the National Standard Institution
of Israel and by the National Quality Assurance (NQA) authority for AS9100.

74

ESA – Fort Worth is certified for Software CMMI Level 2 of the SEI.
ESA – Forth Worth, ESA – Talladega and ESA - Merrimack are certified for
ISO-9001:2000 and AS9100. ESA – Tallahassee is certified for ISO-9001. ESA –
Merrimack also holds an EASA certificate, and the quality systems of ESA - Merrimack and
ESA - Talladega comply with NATO AQAP requirements. ESA’s commercial aviation
operations maintain FAA Part 145 approved repair stations in both New Hampshire and Kansas.
Such operations are FAA Part 21 approved, holding a variety of FAA certifications in
support of ESA’s commercial avionics business line. ESA medical
instruments’ business is registered to ISO 13485:2003, is registered with the FDA as
a GMP manufacturer and is FDA compliant with Quality Systems Regulations 21 CFR Part 820,
803 and 806.

We conduct our business activities and develop Company policies based on a
firm commitment to ethical practices. In addition to our Code of Conduct (see below Item
16.B) and compliance with applicable laws and regulations, we have an active Company-wide
ethics compliance program, incorporating ongoing training awareness and enforcement. In
March 2008, Elbit Systems’ ethics program received the top ranking for a
non-U.S.-based organization, in the Ethisphere Institute’s U.S. Government Contractor
Ethics Program Survey.

We instruct our customers on the proper maintenance of our systems and
products. In addition, we often offer training and provide equipment to assist our
customers in performing their own maintenance. When required, support may be provided by a
local support team or by experts sent from our main facilities.

We generally offer a one - two-year warranty for our systems and products
following delivery to, or installation by, the customer. In some cases we offer extended
warranty periods. We maintain reserves for warranty obligations specifically determined for
each project based on our experience and engineering estimates. These reserves are intended
to cover post-delivery functionality and operating issues for which we are responsible
under the applicable contract.

We actively take the initiative in identifying the individual defense needs
of our customers throughout the world. We then focus our research and development
activities on systems designed to provide tailored solutions to those needs. We often
provide demonstrations of prototypes and existing systems to potential
customers.

75

We market our systems and products either as a prime contractor or as a
subcontractor to various governments and defense contractors worldwide. In Israel, we sell
our military systems and products mainly to the IMOD, which procures all equipment for the
IDF. Our marketing and technical support personnel for sales in Israel operate out of all
of our major facilities in Israel. A number of marketing related support services are
provided on a central shared services basis to various units in the Company. We are
assisted in marketing our systems, products and services in other parts of the world
through subsidiaries, joint ventures, consultants and representatives.

In the U.S., the ESA companies lead our marketing activities, from the Fort
Worth, Merrimack, Talladega and Tallahassee facilities and from offices in the Washington,
D.C. area. A number of marketing related support services are provided on a central shared
services basis to various units in the Company. ESA operates under a Special Security
Agreement that allows it and its subsidiaries to work on certain classified U.S. Government
programs. See above “Principal Subsidiaries – ESA.”

Our subsidiaries in other countries typically lead the marketing activities
in their home countries, often assisted by marketing and business development personnel
based in Israel.

Over the past several years, a number of the major entities in the Company
have entered into cooperation agreements with major defense contractors in the United
States, Europe and certain other key markets. These agreements provide for joint
participation in marketing and performance of a range of projects. In other countries, we
actively pursue business opportunities as either a prime contractor or a subcontractor,
usually together with local companies. Often we enter into cooperation agreements with
other companies for such opportunities.

We operate in a competitive environment for most of our projects, systems
and products. Competition is based on product and program performance, price, reputation,
reliability, life cycle costs and responsiveness to customer requirements. This includes
the ability to respond to rapid changes in technology. In addition, our competitive
position sometimes is affected by specific requirements in particular markets.

In recent years consolidation in the defense industry has affected
competition. This has decreased the number but increased the relative size and resources of
our competitors. We adapt to market conditions by adjusting our business strategy to
changing defense market conditions. We also anticipate continued competition in defense
markets due to declining defense budgets in many countries.

Competitors in the sale of some of our products to the Government of Israel
include IAI and Rafael among others. From time to time we also cooperate with some of our
competitors on specific projects.

Outside of Israel, we compete in a number of areas with major international
defense contractors. Our main competitors include divisions and subsidiaries of Northrop
Grumman Corporation, Raytheon Inc., Honeywell, BAE Systems Ltd., Rockwell Collins, L-3
Communications Holdings, Inc., Thales S.A., Harris Corporation, European Aerospace Defense
and Space Company EADS N.V., Goodrich Corporation, FLIR Systems, Inc., CMC Electronics
Inc., Rhode and Schwartz GmbH, Selex Communications Ltd. and ITT Defense Limited. Our
competitors also include a number of other major defense contractors in the United States
and Europe. Many of these competitors have greater financial, marketing and other resources
than ours. We also compete in the worldwide defense market with numerous smaller companies
as well as other large and small Israeli companies. In addition, we compete with a range of
companies in the commercial avionics market. In certain cases we also engage in strategic
cooperative activities with some of our competitors.

76

Overall, we believe we are able to compete on the basis of our systems
development and technological expertise, our systems’ combat-proven performance and
our policy of offering customers overall solutions to technological, operational and
financial needs.

Sometimes, our revenues from an individual customer account for more than
10% of our revenues in a specific year. Our only such customers during the last three years
were the IMOD, that accounted for 26% in 2005, 24% in 2006 and 21% in 2007, and the U.S.
Government, that accounted for 10% of our revenues in 2005 and 15% of our revenues in
2006.

We place importance on social responsibility to the communities in which we
live and work. This is consistent with our policy of emphasizing ethics in our business
practices. Our policy encourages the voluntary efforts of our Company entities and
employees who donate their time and efforts in the support of members of our communities
who are in need. In this regard, we place priority on initiatives to promote educational
advancement, particularly in the technology sectors. A major activity resulting from our
social responsibility policy is facilitating the placement of our employees as tutors in
peripheral communities and less developed neighborhoods, providing technology-related
knowledge as well as other educational resources generally lacking in those areas. We also
promote numerous other community support activities. Our commitment to social
responsibility initiatives has been reflected in our ongoing ranking among the top Israeli
companies in the “Maala” social responsibility index.

Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International Finance
Corporation. Israel also is a party to the General Agreement on Tariffs and Trade, which
provides for reciprocal lowering of trade barriers among its members. In addition, Israel
has been granted preferences under the Generalized System of Preferences from the United
States, Australia, Canada and Japan. These preferences allow Israel to export products
covered by such programs either duty-free or at reduced tariffs.

Israel and the European Community are parties to a Free Trade Agreement that
provides some advantages for Israeli exports to most European countries and requires Israel
to lower its tariffs on imports from these countries over a number of years. Israel and the
United States entered into an agreement to establish a Free Trade Area that eliminates
tariff and some non-tariff barriers on most trade between the two countries. An agreement
between Israel and the European Free Trade Association, which includes Austria, Norway,
Finland, Sweden, Switzerland, Iceland and Liechtenstein, established a free-trade zone
between Israel and those nations.

The Government of Israel, through the OCS and the Israel Investment Center
(the Investment Center), encourages research and development projects oriented towards
export products and participates in the funding of such projects as well as company
investments in manufacturing infrastructures.

Under the terms currently applying to OCS funding, companies receiving
funding for development of products must pay the Israeli Government a royalty of usually 0%
(in the case of non-royalty bearing grants) to 5% of the sales of products developed from a
project funded by the OCS. These payments start with the beginning of sales of such
products and typically end when 100% of the dollar value of the grant is repaid. For grants
provided starting in 1999, the recipient must also pay interest payments to the OCS on the
amount of the grant. The annual interest payment rate is LIBOR. The terms of Israeli
Government participation also require that the rate of manufacture of products developed
with government grants be performed in Israel at a rate equal to or higher than the rate
contained in the funding proposal, unless a special approval has been granted. Separate
Israeli Government consent is required to transfer to third parties technologies developed
through projects in which the Government participates in the funding of the development
effort.

In 2002, Elop reached agreement with the OCS to join an OCS initiative
applicable to large, research and development intensive Israeli companies. This initiative
allows participating companies to receive OCS funding for generic research and development
without the need for payment of future royalties. However, as a condition to joining the
initiative, companies are required to reach agreement with the OCS on an unconditional
prepayment for existing OCS funded programs in exchange for a release by the OCS from all
obligations. Under Elop’s agreement with the OCS, Elop paid $10.6 million over a
five-year period beginning in 2002 in exchange for a release of Elop’s obligations to
pay further royalties.

The Investment Center promotes Israeli export products and increased
industrialization of peripheral areas through investment in industrial infrastructure. The
Investment Center either provides grants for qualified projects or provides tax benefits
for qualified industrial investments by Israeli companies. In 2005, the regulations
relating to the tax benefit programs of the Investment Center were revised to provide for
review and approval of the tax benefit by the Israel Tax Authority only after a company has
made the applicable investment.

Israeli Labor Laws.Our employees in
Israel are subject to Israeli labor laws. Some employees are also affected by some
provisions of collective bargaining agreements between the Histadrut - General Federation
of Labor in Israel and the Coordination Bureau of Economic Organizations, which includes
the Industrialists’ Association. These labor laws and collective bargaining
provisions mainly concern the length of the work day, minimum daily wages for professional
workers, insurance for work-related accidents, procedures for dismissing certain employees,
determination of severance pay, employment of “manpower” employees and other
conditions of employment.

Severance Pay.Under Israeli law, our Israeli companies are required to make severance
payments to terminated Israeli employees, other than in some cases of termination for
cause. The severance reserve is calculated based on the employee’s last salary and
period of employment. A portion of the severance pay and pension obligation is covered by
payment of premiums to insurance companies under approved plans and to pension funds. The
deposits presented in the balance sheet include profits accumulated to the balance sheet
date. The amounts deposited may be withdrawn only after fulfillment of the obligations
under the Israeli laws relating to severance pay.

78

National Insurance Institute.Israeli
employees and employers are required to pay predetermined sums to the National Insurance
Institute, which is similar to the U.S. Social Security Administration. These amounts also
include payments for national health insurance. As of December 31, 2007, the payments to
the National Insurance Institute were equal to approximately 17.7% of wages,, subject to a
cap if an employee’s monthly wages exceed a specified amount. The employee
contributes approximately 66% and the employer contributes approximately 34%.

Israeli courts may enforce U.S. and other foreign jurisdiction final
executory judgments for liquidated amounts in civil matters, obtained after due process
before a court of competent jurisdiction. This enforcement is made according to the private
international law rules currently applicable in Israel, which recognize and enforce similar
Israeli judgments, provided that:

•

adequate service of process has been made and the defendant
has had a reasonable opportunity to be heard;

•

the judgment and its enforcement are not contrary to the
law, public policy, security or sovereignty of the State of
Israel;

•

the judgment was not obtained by fraud and does not conflict
with any other valid judgment in the same matter between the same
parties;

•

an action between the same parties in the same matter is not
pending in any Israeli court at the time the lawsuit is instituted in the
foreign court; and

•

the judgment is no longer subject to a right of
appeal.

Foreign judgments enforced by Israeli courts generally will be payable in
Israeli currency. The usual practice in Israel in an action to recover an amount in a
non-Israeli currency is for the Israeli court to provide for payment of the equivalent
amount in Israeli currency at the exchange rate in effect on the judgment date. Under
existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli
currency at the foreign currency’s exchange rate on the payment date or in foreign
currency. Until collection, an Israeli court judgment stated in Israeli currency will
ordinarily be linked to the Israeli Consumer Price Index (CPI) plus interest at the annual
rate (set by Israeli regulations) in effect at that time. Judgment creditors must bear the
risk of unfavorable exchange rates.

Our significant accounting policies are described in Note 2 to the audited
consolidated financial statements for the year ended December 31, 2007.

Our results of operations and financial condition are based on the
preparation of consolidated financial statements in conformity with United States generally
accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial
statements requires management to select accounting policies for critical accounting areas
as well as estimates and assumptions and to make judgments that involve the accounting
policies described below that affect the amounts reported in the consolidated financial
statements. Significant changes in assumptions and/or conditions and changes in critical
accounting policies could materially impact our operating results and financial
condition.

We believe our most critical accounting policies relate to:

•

Revenue Recognition.

•

Business Combinations and Purchase Price
Allocation.

•

Impairment of Goodwill and Other Long-Lived
Assets.

•

Other-Than-Temporary Decline in Value of Investments in
Investee Companies.

We generate revenues, mainly from long-term contracts involving the design,
development, manufacture and integration of defense systems and products. In addition, to a
minor extent we provide support and services for such systems and products.

Revenues from long-term contracts are recognized based on Statement of
Position 81-1 “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts” (SOP 81-1) according to which revenues are recognized on
the percentage-of-completion basis.

Sales under long-term fixed-price contracts which provide for a substantial
level of development efforts in relation to total contract efforts are recorded using the
cost-to-cost method of accounting as the basis to measure progress toward completing the
contract and recognizing revenues. According to this method, sales and profits are recorded
based on the ratio of costs incurred to estimated total costs at completion. In certain
circumstances, when measuring progress toward completion, we consider other factors, such
as achievement of performance milestones.

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Sales and anticipated profit under long-term fixed-price production type
contracts are recorded on a percentage-of-completion basis, using the units-of-delivery as
the basis to measure progress toward completing the contract and recognizing revenues. In
certain circumstances, which involve long-term fixed-price production type contracts for
non-homogenous or small quantity of units, revenue is recognized based on the achievement
of performance milestones, which provide a more reliable, and objective, measure to the
extent of progress toward completion.

Sales and anticipated profit under long-term fixed-price contracts that
involve both development and production are recorded using the cost-to-cost method and
units-of-delivery method as applicable to the phase of the contract, as the basis to
measure progress toward completion. In addition, when measuring progress toward completion
under the development portion of the contract, we consider other factors, such as
achievement of performance milestones.

The percentage-of-completion method of accounting requires management to
estimate the cost and gross profit margin for each individual contract. Estimated gross
profit or loss from long-term contracts may change due to changes in estimates resulting
from differences between actual performance and original estimated forecasts. Such changes
in estimated gross profit are recorded in results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis. Anticipated losses on contracts
are charged to earnings when determined to be probable.

Sales under cost-reimbursement-type contracts are recorded as costs are
incurred. Applicable estimated profits are included in earnings in the proportion that
incurred costs bear to total estimated costs.

Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and realization is probable.
Penalties and awards applicable to performance on contracts are considered in estimating
sales and profit rates and are recorded when there is sufficient information to assess
anticipated contract performance.

We believe that the use of the percentage-of-completion method is
appropriate as the Company has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify the enforceable rights regarding
services to be provided and received by the parties to the contracts, the consideration to
be exchanged and the manner and terms of settlement. In all cases the Company expects to
perform our contractual obligations, and our customers are expected to satisfy their
obligations under the contract.

In cases where the contract involves the delivery of products and
performance of services, we follow the guidelines specified in EITF 00-21, “Revenue
Arrangements with Multiple Deliverables” in order to allocate the contract fees
between the products accounted for under SOP 81-1 and the services.

In certain circumstances, sales under short-term fixed-price production type
contracts are accounted for in accordance with SAB No. 104, “Revenue Recognition in
Financial Statements” (SAB 104). In such cases sales are recognized when the
following criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the seller’s price to the buyer is fixed or determinable, no further
obligation exists and collectability is reasonably assured. When such contracts involve the
delivery of multiple products that are delivered at different times, EITF-00-21 is applied
in allocating contract fees to the various items.

81

Management reviews periodically the estimates of progress towards completion
and project costs. These estimates are determined based on engineering estimates and past
experience, by personnel having the appropriate authority and expertise to make reasonable
estimates of progress towards contract completion and the related costs. Such engineering
estimates are reviewed periodically for each specific contract by professional personnel
from various disciplines within the organization. These estimates take into consideration
the probability of achievement of certain milestones, as well as other factors that might
impact the contract’s completion.

A number of internal and external factors affect our cost estimates,
including labor rates, estimated future material prices, revised estimates of uncompleted
work, efficiency variances, linkage to indices and exchange rates, customer specifications
and testing requirement changes. If any of the above factors were to change, or if
different assumptions were used in estimating progress cost and measuring progress towards
completion, it is likely that materially different amounts would be reported in our
consolidated financial statements.

Business combinations are accounted for using the purchase method of
accounting, under which the total purchase price of the acquired companies is allocated to
the tangible and intangible assets acquired and liabilities assumed, as well as to
in-process research and development (IPR&D) based on their estimated fair values, and
the excess of the purchase price over the fair value of the net assets of the purchased
businesses is recorded as goodwill. The aggregate purchase price of any investment
accounted for under either the consolidation or the equity method of accounting is
allocated to identifiable net tangible assets, intangible assets other than goodwill,
IPR&D activities and to goodwill. The amount allocated to IPR&D is charged
immediately to the Company’s results of operations in accordance with FASB
Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method” (FIN 4). The amounts allocated to finite-lived
intangible assets other than goodwill are amortized on a straight-line basis over their
weighted average expected useful life.

We engage third-party appraisal firms to assist management in determining
the fair values of certain assets acquired and liabilities assumed. Estimating the fair
value of certain assets acquired and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions, mainly with respect to
intangible assets. Management makes estimates of fair value based upon assumptions believed
to be reasonable. These estimates are based on historical experience and information
obtained from the management of the acquired companies and are inherently uncertain. While
there are a number of different methods for estimating the value of intangibles acquired,
the primary method used is the discounted cash flow approach. Some of the more significant
estimates and assumptions inherent in the discounted cash flow approach include projected
future cash flows, including their timing, a discount rate reflecting the risk inherent in
the future cash flows and a terminal growth rate. Another area which requires judgment and
can impact our results of operations is estimating the expected useful lives of the
intangible assets. Unanticipated events and circumstances may occur that may affect the
accuracy or validity of such assumptions, estimates or actual results.

To the extent intangible assets are ascribed with longer useful lives, there
may be less amortization expenses recorded in any given period. As the Company operates in
industries which are extremely competitive, the value of the intangible assets, including
goodwill and their respective useful lives, are exposed to future adverse changes, which
can result in an impairment charge to our results of operations.

Consistent with Statement of Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Other Intangible Assets” (SFAS 142), goodwill and intangible
assets deemed to have indefinite lives are not amortized but are subject to periodic
impairment tests, at least on an annual basis. According to SFAS 142, goodwill impairment
is deemed to exist if the net book value of a reporting unit exceeds its estimated fair
value. We conduct a goodwill impairment review at least annually and more frequently
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment review include
significant underperformance relative to historical or expected future operating results
and significant negative industry or economic trends. We test for impairment at a level
referred to as a reporting unit. Determining fair value of a reporting unit involves the
use of significant estimates and assumptions. These estimates and assumptions could have an
impact on whether or not an impairment charge is recognized. To determine fair value, we
may use a number of valuation methods.

The methods commonly used to value reporting units are the Income, Market
and Cost approaches. Our reporting units’ fair market value is estimated using either
of two valuation methodologies: the Income Approach and the Market Approach. As mentioned
above, these approaches use estimates and assumptions including projected future cash
flows, discount rate and terminal growth rate. Using different assumptions could result in
different results.

As of December 31, 2007, our goodwill amounted to $332 million. We tested
our goodwill for impairment as of December 31, 2007 and concluded that no impairment loss
was identified.

Consistent with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” we evaluate long-lived assets for impairment and
assess their recoverability whenever events or circumstances indicate that carrying amount
of an asset may not be recoverable. The recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the asset. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair value. In the evaluation of fair value, we use significant estimates
and assumptions such as projected future cash flows which are subject to high degree of
judgment. If the carrying value of a long-lived asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. In the valuation of fair value we use
judgment as to which is the most appropriate method to use for measuring fair value and as
to what assumptions to use in implementing the methodology chosen. As we operate in
industries which are extremely competitive, changes in the assumptions and estimates may
affect the carrying value of the intangible assets, and could result in an impairment
charge to our results of operations. As of December 31, 2007, our long-lived assets
amounted to $649.4 million, including $298.7 million identifiable in intangible assets, and
we concluded that there were no indicators of impairment present during and up to the end
of the year.

Should our future impairment tests determine that impairment has occurred in
the value of our goodwill or long-lived assets, such impairment may have a material effect
on our financial results in the period in which the impairment is determined. See also
“2007 Compared to 2006 - Finance Expenses (Net)” below.

At the end of each reported period we evaluate whether an
other-than-temporary decline in the value of an investment in investee companies has been
sustained. This evaluation is judgmental in nature. If it has been determined that an
investment has sustained an other-than-temporary decline in its fair value relative to its
carrying value, the investment is written down to its fair value by a charge to our results
of operations.

83

An evaluation of fair value is dependent upon specific facts and
circumstances. Factors that are considered in this determination include financial
information (including, among others, budgets, business plans and financial statements) and
independent appraisals, if available. Factors indicative of an other-than-temporary decline
include recurring operating losses, credit defaults, specific conditions affecting the
investment, such as in the industry or in a geographic area, and subsequent rounds of
financing at an amount below the cost basis of the investment. This list is not all
inclusive, and we weigh all quantitative and qualitative factors in determining if an
other-than-temporary decline in value of an investment has occurred. As the Company
operates in industries that are extremely competitive, it is possible that estimates could
change in the near term, and there can be no assurance that an additional write-down or
write-off of the carrying value of an investment will not be required in the
future. See also “2006 Compared to 2005 - Other Income (Expenses) (Net)”
below.

Intangible assets and property, plant and equipment are amortized over their
estimated useful lives. Determining the useful life of such assets involves the use of
estimates and judgments. In determining the useful life we take into account various
factors such as the expected use of the assets, effects of obsolescence, including
technological developments, competition, demand, changes in business, acquisitions and
other economic factors. If we estimate changes and the useful lives of such assets increase
or decrease, it will affect our results of operations. See above – “Impairment
of Goodwill and Long-Lived Assets” for further discussion of the effects of changes
in useful lives.

We record income taxes using the asset and liability approach. Management
judgment is required in determining our provision for income taxes in each of the
jurisdictions in which we operate. The provision for income tax is calculated based on our
assumptions as to our entitlement to various benefits under the applicable tax laws in the
jurisdictions in which we operate. The entitlement to such benefits depends upon our
compliance with the terms and conditions set out in these laws. We have considered future
taxable income, prudent and feasible tax planning strategies and other available evidence
in determining the need for a valuation allowance. Although we believe that our estimates
are reasonable and that we have considered future taxable income and ongoing prudent and
feasible tax strategies in estimating our tax outcome, there is no assurance that the final
tax outcome will not be different than those which are reflected in our historical income
tax provisions and accruals. Such differences could have a material effect on our income
tax provision, net income and cash balances in the period in which such determination is
made.

On January 1, 2007, we adopted FIN No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN No. 48), which contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with SFAS
No. 109, “Accounting for Income Taxes” (SFAS No. 109). The first step
is to evaluate the tax position taken or expected to be taken in a tax return by
determining if the weight of available evidence indicates that it is more likely than not
that, on an evaluation of the technical merits, the tax position will be sustained on
audit, including resolution of any related appeals or litigation processes. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. Prior to January 1, 2007, we estimated our
uncertain income tax obligations in accordance with SFAS No. 109 and SFAS No. 5
“Accounting for Contingencies.”

The impact on our consolidated financial position and results of
operations as a result of the adoption of the provisions of FIN 48 was approximately $4.85
million, which was recognized as an adjustment to opening retained earnings.

We recorded interest related to its unrecognized tax benefit as income tax
expense. Our January 1, 2007 unrecognized tax benefit included approximately $2.45 million
of interest.

We account for our marketable securities in accordance with SFAS No.
115,“Accounting for Certain Investments in Debt and Equity
Securities”(SFAS 115).

Our marketable securities at December 31, 2007 included principal
investments in Auction Rate Securities (ARS). The ARS held by us as a result of the
acquisition of Tadiran are private placement securities with long-term nominal maturities
for which the interest rates are reset through a “dutch” auction each month.
The monthly auctions historically have provided a liquid market for these securities. Our
investments in ARS represent interests in collateralized debt obligations supported by
pools of residential and commercial mortgages or credit cards, insurance securitizations
and other structured credits, including corporate bonds. Some of the underlying collateral
for the ARS held by us consists of sub-prime mortgages.

Although the ARS continue to pay interest according to their stated terms,
based on fair value indications received and valuation models applied by the investment
banks and an analysis of other-than-temporary impairment factors, we recorded an impairment
charge of approximately $10 million in the fourth quarter of 2007, reflecting the portion
of ARS holdings that we concluded have an other-than-temporary decline in value, and the
cost was included in Finance Expenses net. In addition, we recorded an unrealized pre-tax
loss of approximately $0.9 million in other comprehensive income, reflecting an adjustment
to ARS holdings that we concluded to have a temporary decline in value.

Historically, given the liquidity created by the auctions, ARS were
presented as current assets under marketable securities on our balance sheet. As a result
of the failed auctions, in recent periods the Company’s ARS are illiquid until there
is a successful auction for them. Accordingly, the entire amount of such remaining ARS has
been reclassified from current to non-current assets on our balance sheet.

The valuation of our investment portfolio is subject to uncertainties that
are difficult to predict. Factors that may impact our valuation include changes to credit
ratings of the securities as well as to the underlying assets supporting those securities,
rates of default of the underlying assets, underlying collateral value, discount rates,
counterparty risk and ongoing strength and quality of market credit and
liquidity.

The credit and capital markets have continued to deteriorate in 2008. If
uncertainties in these markets continue, these markets deteriorate further or we experience
any additional ratings downgrades on any investments in our portfolio, we may incur
additional impairments to our investment portfolio, which could negatively affect our
financial condition, cash flow and reported earnings. See also the discussion below
in this Item 5 under the caption “Liquidity and Capital Resources—Auction Rate
Securities.”

According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, Elbit
Systems is required to include in our annual report for the fiscal year ending December 31,
2007 an assessment, as of the end of the fiscal year, of the effectiveness of our internal
controls over financial reporting.

During 2007, we took steps to assure compliance of our documentation and
internal controls over financial reporting with the guidelines stipulated in the
Sarbanes-Oxley Act. We completed the required activities for the 2007 year end financial
statements. See below – Item 15. Controls and Procedures – Management’s
Annual Report on Internal Control Over Financial Reporting.

The following are the recently issued accounting standards that may have an
impact on our future financial statements:

•

SFAS 157.In September
2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value and enhances fair value measurement disclosure. In
February 2008, the FASB issued FASB Staff Position (FSP) 157-1,
“Application of FASB Statement No. 157 FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13”
(FSP 157-1) and FSP 157-2, “Effective Date of FASB Statement
No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to
remove certain leasing transactions from its scope. FSP 157-2 delays
the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis
(at least annually), until the beginning of the first quarter of 2009. The
measurement and disclosure requirements related to financial assets and
financial liabilities are effective for the Company beginning in the first
quarter of 2008.

The resulting fair values calculated under
SFAS No. 157 after adoption may be different from the fair values
that would have been calculated under previous guidance. We are currently
evaluating the impact that SFAS No. 157 will have on our consolidated
financial statements when it is applied to non-financial assets and
non-financial liabilities beginning in the first quarter of 2009.

•

SFAS 159.In February 2007, the
FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (SFAS 159). SFAS 159 permits companies to
record certain financial instruments and other items at fair value. The
standard requires unrealized gains and losses to be reported in earnings
for items measured using the fair value option. SFAS 159 is
effective for the Company beginning in the first quarter of 2008. The
adoption of SFAS 159 did not have a significant impact on our
consolidated financial statements.

•

EITF 07-3.In June 2007, the
FASB ratified EITF 07-3, “Accounting for Non-Refundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities” (EITF 07-3). EITF 07-3 requires
that nonrefundable advance payments for goods or services that will be used
or rendered for future research and development activities be deferred,
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a
prospective basis, for fiscal years beginning after December 15, 2007.
The adoption of EITF 07-3 did not have a material impact on our
consolidated results of operations and financial condition.

86

•

SFAS 141(R).In December 2007,
the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS 141(R)). Under SFAS 141(R), an entity
is required to recognize the assets acquired, liabilities assumed,
contractual contingencies and contingent consideration at their fair value
on the acquisition date. SFAS 141(R) further requires that
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date and changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after
the measurement period will impact income tax expense. In addition,
acquired IPR&D is capitalized as an intangible asset and amortized over
its estimated useful life. The adoption of SFAS 141(R) will change our
accounting treatment for business combinations consummated beginning in the
first quarter of 2009, and we are currently assessing that
impact.

•

SFAS 160.In December 2007, the
FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51” (SFAS 160). SFAS 160
addresses the accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and
the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years beginning after December 15, 2008, and will
be adopted by the Company in 2009. We are currently assessing the impact of
this standard on our future consolidated results of operations and
financial condition.

•

SFAS 161.In March 2008,
the FASB issued SFAS 161, “Disclosures about Derivative Instruments
and Hedging Activities” (SFAS 161). SFAS 161 is an amendment of SFAS
133, “Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133). To address concerns that the existing
disclosure requirements of SFAS 133 do not provide adequate information,
SFAS 161 requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. SFAS 161 will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. We
are currently evaluating the future impacts and disclosures relating to
SFAS 161.

87

Off Balance Sheet and Other Long-Term Arrangements and
Commitments

Buy-Back.In connection with projects in
certain countries, Elbit Systems and certain of our subsidiaries undertook to make or
facilitate purchases or investments in those countries at specified percentages (typically
up to 100%) of the amount of the specific contract. The maximum aggregate undertaking as of
December 31, 2007 amounted to approximately $883 million to be performed over a period of
up to 10 years. In the opinion of our management, the actual amount of the investments and
purchases should be less than that mentioned above, since certain investments and purchases
can result in reducing the overall undertaking on more than a one-to-one basis. See above
– Item 4. Information on the Company – Buy-Back.

Government Funding of Development.Elbit
Systems and certain Israeli subsidiaries partially finance our research and development
expenditures under programs sponsored by the Government of Israel Chief Scientist Office
(OCS) for the support of research and development activities conducted in Israel. At the
time the participations were received, successful development of the related projects was
not assured. In exchange for participation in the programs by the OCS, Elbit Systems and
the subsidiaries agreed to pay 0% - 5% of total sales of products developed within the
framework of these programs. The obligation to pay these royalties is contingent on actual
sales of the products. Elbit Systems and some of our subsidiaries may also be obligated to
pay certain amounts to the IMOD and others on certain sales including sales resulting from
the development of some of the technologies developed with their participation. See above
– Item 4. Information on the Company – Conditions in Israel – Chief
Scientist (OCS) and Investment Center Funding.

Lease Commitments.The future minimum lease
commitments of the Company under various non-cancelable operating lease agreements in
respect of premises, motor vehicles and office equipment as of December 31, 2007 were as
follows: $26 million for 2008, $23 million for 2009, $19 million for 2010 and $28 million
for 2011 and thereafter.

Bank Covenants.In connection with bank credits
and loans, including performance guarantees issued by banks and bank guarantees in order to
secure certain advances from customers, Elbit Systems and certain subsidiaries are
obligated to meet certain financial covenants. See below – “Liquidity and
Capital Resources – Financial Resources.” Such covenants include requirements
for shareholders’ equity, current ratio, operating profit margin, tangible net worth,
EBITDA, interest coverage ratio and total leverage. As of December 31, 2007, Elbit Systems
and our subsidiaries, except Elisra, were in compliance with all covenants. As of December
31, 2007 and 2006, Elisra did not comply with its financial covenants. As a result, the
banks requested to register a general floating lien on the assets of Elisra. In February
2007, Elisra’s Board of Directors approved the banks’ request. Subsequent to
balance sheet date, Elisra granted first priority liens and/or floating liens on all of its
property and assets with no limitations as to amount.See below -
Item 18. Financial Statements – Note 17(F) (Commitments and Contingent Liabilities
– Covenants).

Bank Guarantees.As of December 31, 2007,
guarantees in the aggregate amount of approximately $963 million were issued by banks on
behalf of several Company entities primarily in order to secure mainly certain advances
from customers and performance bonds.

88

Purchase Commitments.As of
December 31, 2007 and 2006, the Company had purchase commitments that amounted to
approximately $906 and $681 million, respectively. These purchase orders and subcontracts
are typically in a standard format proposed by us, with the subcontracts and purchase
orders also reflecting provisions from the applicable prime contract that are appropriate
to flow down to subcontractors and vendors. The terms typically included in these
purchase orders and subcontracts are consistent with Uniform Commercial Code provisions in
the United States for sales of goods, as well as with specific terms called for by our
customers in international contracts. These terms include our right to terminate the
purchase order or subcontract in the event of the vendors’ or subcontractors’
default, as well as our right to terminate the order or subcontract for our convenience (or
if our prime contractor has so terminated the prime contract). Such purchase orders and
subcontracts typically are not subject to variable price provisions.

Cancellation of Export Authorizations for Elisra Project.As a result of cancellation of the export authorization in 2006 to a foreign
country (the Customer), Elisra and one of its subsidiaries were forced to terminate four
projects. Most of the activity in respect of the projects, of which the total amount was
approximately $40 million, has already been executed and the deliveries have been made to
the Customer. For those projects, Elisra and its subsidiary provided to the Customer
advances and performance guarantees issued by banks and financial institutions. As of
December 31, 2007, the total of these advance payment and performance guarantees was
approximately $7 million (as of December 31, 2006 - $10 million). Elisra’s and Elbit
Systems’ management, based on the opinion of our legal advisors, believe that the
financial impact of the four projects’ termination in excess of the accruals recorded
in the financial statements will not have a material adverse effect on the financial
position or results of operations of Elbit Systems. The Customer financed the projects by
means of bank loans. The banks received indemnity letters as security for repayment of the
loans. Most of the indemnity was provided to the banks by International Foreign Trade Risks
Insurance Company (IFTRIC) (since renamed ASHRA), and the balance was provided by Elisra
and its subsidiary. In addition, Elisra provided indemnity letters to IFTRIC that can be
exercised upon the occurrence of specific unusual events and is subject to IFTRIC
fulfilling its commitments to the banks. In the opinion of Elisra’s and Elbit
Systems’ management, no provisions are required in respect of these indemnity
letters.

In April 2007, we completed a cash tender offer (the Offer) for the balance
of the ordinary shares of TadComm that we did not already own. Prior to the completion of
the Offer, TadComm was a publicly traded company in Israel in which we held 42% of
TadComm’s outstanding shares, which we recorded as an investment on the equity basis
of accounting.

As a result of the Offer, TadComm became a private company and our
wholly-owned subsidiary. We paid an aggregate of approximately $383 million for the TadComm
shares acquired in the Offer. The results of TadComm are consolidated in the
Company’s financial statements commencing May 1, 2007, the beginning of the month
after the date of completion of the Offer.

TadComm operates mainly in the defense communication area. We are active in
the radio communication and computer area, and use integrated communication equipment in
our systems. We foresee synergies between our Land and C4I systems operations
and TadComm, by providing advanced integrated network and communication solutions to our
customers.

The table below summarizes the Purchase Price Allocation (PPA), based on a
PPA performed by an independent advisor, for the aggregate assets acquired, and liabilities
assumed, in connection with the acquisition of the TadComm shares as follows:

89

Book value ofacquired interestin TadComm

Excesscost

Total

Expected useful lives

(in thousands of U.S. dollars)

Working capital

$

67,600

(17,400

)

$

50,200

Long-term assets and investments

34,800

—

34,800

Property, plant and equipment

9,300

1,100

10,400

20 years

Long-term liabilities

(53,000

)

800

(52,200

)

Brand name

5,700

18,200

23,900

15 years

Customer relationships and backlog

—

96,800

96,800

2-10 years

Technology

2,700

40,800

43,500

10 years

IPR&D

—

16,600

16,600

Immediate write-off

Deferred taxes

—

(35,100

)

(35,100

)

Goodwill

32,800

161,300

194,100

Indefinite – subject to
annual impairment test

$

99,900

$

283,100

$

383,000

The assets and liabilities recorded in connection with the PPA for the
TadComm acquisition were based upon estimates of fair values for contracts in process,
inventories, estimated costs in excess of estimated contract value to complete contracts in
process in a loss position, contingent assets and liabilities, identifiable intangibles,
goodwill, property, plant and equipment and deferred income taxes.

Following the acquisition of the TadComm shares in the second quarter of
2007, we identified and wrote-off duplicated inventories and equipment and accrued
termination costs relating to existing Elbit Systems’ business in a total amount of
approximately $10.5 million, which was recorded as restructuring costs in the cost of
revenues.

The following unaudited proforma data is based on historical financial
statements of the Company and TadComm and is provided for comparative purposes only. The
proforma information does not purport to be indicative of the results that actually would
have occurred had the purchase of the shares been consummated prior to the beginning of the
reported periods.

The proforma information reflects the results of the Company’s
operations assuming that TadComm’s results were included in the Company’s
consolidated results prior to each of the reported periods and under the following
assumptions: